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SCIENCE OF VALUE No 10 

The 

SPHINX CATECHISM 

By HENRY RAWIE 



"For the needy shall not always be forgotten: 
the expectation gf the poor shall not perish 
forever." — Psalms 9-18. 




GEO. W. KING PRINTING COMPANY 

31 SOUTH HOWARD STREET 

BALTIMORE, MD. 









Copyright Secured 1911 by 

HENRY RAWIE 

910 American Building, Baltimore, Md. 



<f 






C1.A2S9032 



TABLE OF CONTENTS. 

Chapter I. Page. 

Introduction 5 

Chapter II. 

Clearing the Ground 7 

Chapter III. 

Profits 15 

Chapter IV. 

Introduction of Money „ 22 

Chapter V. 

Machinery 37 

Chapter VI. 

Inflation of the Currency 47 

Chapter VII. 

Secondary Money 60 

Chapter VIII. 

Capital 72 

Chapter IX. 

Trade 78 

Chapter X. 

Standard of Value for Capital 91 

Chapter XI. 

Permanent Debts 104 

Chapter XII. 

Division of the Rate of Profit 118 

Chapter XIII. 

Banking 157 

Chapter XIV. 

The Rise in the Price of Land „ 204 

Chapter XV. 
Conclusion 222 



The Sphinx Catechism. 



Chapter I. 
INTRODUCTION. 

"Nothing is impossible to Industry," said one 
of the seven wise men of Greece more than 
twenty-five hundred years ago, and thousands 
of years before his time the same truth had 
doubtless been revealed to other wise men, 
and the problems of industry continue to per- 
plex the wise men of today. 

One nation after another has grown, from the 
bare earth to wealth and power, only to fall in 
ruin and decay. Industry was driven to hovels, 
while irresponsible power was enthroned in 
palaces and was worshiped in temples. 

Over the ruins of Empire the brooding and 
Sardonic Sphinx has been propounding her 
riddle, offering to give to man a heaven upon 
earth if he answers correctly, but failing to 
answer he will be destroyed. 

The cold shadow of this stone image of de- 
struction is now beginning to cover the world 
with its desolation, and we must make haste 
or we will likewise perish. To her, to this 



6 The Sphinx Catechism. 

Sphinx of History, to this silent monument, 
over the graves of fallen Empires, we put ques- 
tions that the riddle may be answered and our 
civilization may be saved, 

Why does Industry itself become impossible, 
and why do its blessings wither and waste? 
Is it because Industry is never rewarded with 
wealth? 



Chapter II. 
CLEARING THE GROUND. 

1 Q. What is the riddle of Industry? 

A. That everyone may find profitable work. 

2 Q. What do you mean by profitable work? 

A. That common labor should receive wages 
which buys a comfortable living according to 
modern standards, getting the advantage of 
new machinery and inventions, and get an addi- 
tional sum as wages which will enable it to buy 
its share of income-producing property. 

3 Q. Do capitalists oppose laborers by re- 
ducing wages and thus take away the profits 
from work? 

A. No ; capital comes into existence because 
new and more profitable work has been pro- 
vided, and when capital opposes labor it does 
so on account of the riddle of industry. 

4 Q. Will capital only employ labor when it 
is profitable to do so? 

A. Capital employs labor only when it is 
profitable to do so, and any scheme which hopes 
to employ labor unprofitably is contrary to 



8 The Sphinx Catechism. 

common sense. When labor is employed at 
tasks that do not pay, then something is taken 
from profitable labor to make up the loss. 

5 Q. Is there a riddle of industry outside 
the laborer who is willing to work, and outside 
the capitalist who is as willing to employ him ? 

A. Yes. 

6 Q. Is this outside power made up of what 
Socialists call the capitalistic system of pro- 
duction for profit? 

A. No ; production for profit is the only kind 
of production desirable or possible. 

7 Q. If capitalists are wholly interested in 
making money, if labor is willing to have them 
make money, and if capitalists make more 
money when wages are high, there must be 
something wrong with money? 

A. When labor and capital are idle, money 
is also idle, and if something is wrong with 
money is must be with the circulation of money 
and not with the kind of money or with the 
quantity of it. 

8 Q. How about land which someone is re- 
quired to buy and own before modern industry 
is possible? Is the land system responsible? 

A. Perhaps. 



Clearing the Ground. 9 

9 Q. Why perhaps; is there something else? 

A. Yes; there are laws of nature by which 
the distribution of wealth is regulated and con- 
trolled. 

10 Q. But why do you say the land system, 
perhaps ? 

A. Because land is also idle when labor, cap- 
ital and money are idle, and the land system is 
responsible if it alone interferes with the nat- 
ural laws which regulate the distribution of 
wealth. 

11 Q. Have individual landowners the same 
interest in high wages that capitalists have? 

A. Yes, because the gain to the landowner 
must arise from surplus wages above the cost 
of living. 

12 Q. Don't landowners gain from the in- 
trinsic quality or value of the soil ? 

A. No; nature will not permit a price to be 
paid for something she furnishes without cost ; 
the price of land arises by taking price away 
from labor and capital. 

13 Q. Land value does not then arise on 
account of the location or quality of land ? 



10 The Sphinx Catechism. 

A. No; land value arises from the unequal 
distribution of wealth by creating a price for 
land which would otherwise become higher 
prices for labor. 

14 Q. Landowners, as a class, are more pow- 
erful than any other class in the community, 
because they control the earth itself, and may 
drive people off the earth, a few at a time, it is 
true, but they have such power if they chose 
greedily and ignorantly so to use it? 

A. Landowners have some such power to a 
limited degree. 

15 Q. How limited? 

A. Limited by their own need for labor. 
They themselves would perish in seeking to thus 
injure labor, and they may only gain from the 
activity of labor. 

16 Q. Do you mean that modern methods of 
production affect the individual landlord the 
same as the capitalist, and he is thereby pre- 
vented from directly interfering with labor? 

A. Yes ; the single landlord may often oppress 
labor in seeking pay for the use of land, and in 
seeking more than labor may give, but such 
landlords are the exception and are not the 
rule in business. 



Clearing the Ground. 11 

17 Q. You hold that landlords have no per- 
sonal interest in keeping labor from using land? 

A. No more hope for gain than has a capital- 
ist in shutting up his factory. 

18 Q. But when factories close on account 
of bad markets, the idle men could restore the 
markets again if they could get access to land? 

A. Laborers on free land must have markets, 
and merely to increase the output from free 
land would make a bad market worse instead 
of better. 

19 Q. But idle labor might use idle land to 
supply their own wants and thus escape beg- 
gary and starvation? 

A. Idle labor, in considerable numbers, could 
not escape starvation on free land. The riddle 
of the centuries has a deeper meaning than to 
allow laborers to exist as well-fed animals. 

20 Q. But would not a temporary escape to 
free land so relieve the market from idle labor 
as to start the wheels of industry in dull times ? 

A. It would not, because there is not only 
idle land for labor at such times, but idle 
money and idle factories would be willingly put 
into free operation if the dull market could 
therebv be relieved. 



12 The Sphinx Catechism. 

21 Q. Is the problem one of markets which, 
must be fostered by protective tariffs and by 
special legislation for the benefit of capitalists 
and landowners who may thereby employ labor? 

A. No. 

22 Q. If labor had access to all unused land, 
would not poverty disappear? 

A. It would not, unless it was temporary and 
among a few people, because the present popu- 
lation of the world can only escape poverty by 
maintaining and by extending our system of 
enormous production and transportation. 

23 Q. If each landlord put his land to its 
best use, properly conserving our natural re- 
sources, would such a system solve the riddle 
of the Sphinx? 

A. It would not. 

24 Q. If capitalists, financiers and landown- 
ers, combined into one gigantic trust, were to 
use land to its best advantage, supply labor 
with the best appliances and furnish all the 
money that was required to pay the highest 
wages, would such a system solve the problem ? 

A. It would not. 



Clearing the Ground. 13 

25 Q. Labor depends upon capital to be fully 
employed, and capital must have land first? 

A. True. 

26 Q. But capitalists and landowners will 
only employ labor when it is profitable to 
do so? 

A. Yes. 

27 Q. Then we seem to have the money ques- 
tion to deal with. Does money become so scarce 
on account of waste and extravagance that 
labor fails accordingly in finding employment? 

A. No ; extravagance and speculation is lim- 
ited by natural law to the guilty only, and the 
evil effects of speculation never reach the mass 
of mankind. 

28 Q. But laborers, it is claimed, are becom- 
ing daily more lazy, inefficient and extravagant, 
are doing less work for the same money, and 
seem to be destroying the very foundations of 
industry ? 

A. Laborers are doing all the work which is 
being done, and they create and sustain all the 
wealth in existence. 

29 Q. But the fountain of money which em- 
ploys labor must run dry in hard times ? 



3 4 The Sphinx Catechism. 

A. No; the fountain can not run dry if labor 
is employed, for it is being perpetually re- 
newed each day by labor. 

30 Q. If the fountain of money can always 
be kept full by employing labor, where does the 
trouble begin? 

A. The trouble begins when profits run dry, 
which is another matter. 



Chapter III. 
PROFITS. 

31 Q. Is the riddle of the centuries based 
upon profits? If they are permitted to fail, 
will civilization fail? 

A. Yes; progress means an increase in 
wealth, and an increase in wealth means that 
a daily surplus above requirements is con- 
stantly created by labor, and unless this daily 
surplus is maintained, civilization is in danger 
of collapse. 

32 Q. How is it possible for a civilization 
which requires centuries to build to be thus set 
upon its apex and fall, when the world is teem- 
ing with wealth? 

A. The answer is, that the world has no 
vitality unless its wealth is fulfilling the pur- 
pose of civilization. 

33 Q. But may not progress be carried on 
from day to day without profit ? 

A. No ; progress implies tomorrow instead of 
today, and unless provision is being made each 
day for tomorrow and for the future, society 
must relapse into barbarism. 



16 The Sphinx Catechism. 

34 Q. Then the vitality of society is based 
upon its future, rather than upon its present 
existence ? 

A. Yes ; we might live, for example, as though 
the world were to come to an end next week, 
and to do so would destroy the value of all 
property depending upon the future, while it 
would enhance the price of property, which 
would give to us a few more days of mad and 
whirling excitement. 

35 Q. I gather from this that when profits 
run dry it is notice to civilization that its world 
is coming to an end ? 

A. True. 

36 Q. In a primitive society, where people 
barter their products, they are not so limited 
in their pursuits by profits, are they ? 

A. The moment the laborer lays by a store of 
food for future use, and uses his spare time to 
build a shelter for his family, such an advance 
is derived from the surplus above his daily 
needs, and is wholly profit. 

37 Q. Are profits vital because laborers who 
fail to share in them are forced to live from 
hand to mouth and have no hope for the future? 

A. Yes. 



Profits. 17 

38 Q. Can you state in a few words how 
profit has become so vitally important? 

A. By the introduction of money in place of 
barter. 

39 Q. You mean that with barter there would 
naturally arise a fair distribution of profits, 
while, with money intervening, such distribu- 
tion may be prevented? 

A. Yes. 

40 Q. Upon what particular quality in money 
does profits depend? 

A. Profits depend upon the fact that money 
itself is more desirable than any other thing. 

41 Q. Can you explain this? 

A. Money must be made more desirable than 
anything else, or it would not exchange with or 
be preferred to other things. 

42 Q. But money came gradually into use, 
and this fact should have corrected any faults 
in its evolution? 

A. This fact did correct faults in the evolu- 
tion of money itself, but does not prevent our 
interference with the circulation of money at 
any time. 



18 The Sphinx Catechism. 

43 Q. You say, however, that profit is based 
upon the fact that the people desire money 
more intensely than they desire anything else? 

A. Yes; and this demand for money is in 
itself an evolution of desire. 

44 Q. Please explain the rise in demand for 
money, beginning with primitive society. 

A. When trade made its first beginning one 
commodity was used as a medium of barter 
because it was more desirable than another. 

45 Q. Because each one wanted that particu- 
lar commodity and would always give up some- 
thing else in order to get it? 

A. Yes ; and upon this basis of desirability a 
commodity used for a time as money would be 
superseded by another more universal in its 
demand among the people. 

46 Q. Then the commodity used as money 
became a measure of value to people who 
wanted the things they did not produce? 

A. Yes, to a degree, but utility was the first 
idea to arise in the mind from the use of barter 
money. The commodity used as money ac- 
quired the usefulness of every other commodity 
for which it would exchange, and therefore this 
use idea, which is naturally confined to a defi- 



Profits. 19 

nite object, spread so as to include money, and 
the want of money embraced the want of every 
object for which it would exchange. 

47 Q. The idea we have of value is merely an 
idea of the utility of each and every object 
which money will buy? 

A. Yes ; a hungry man is driven to seek food, 
and among savages, when such hunger is once 
satisfied, they never stir until hunger again 
drives them. 

48 Q. But how has this savage, with a single 
appetite, been induced to change? 

A. Different tribes of savages had different 
environments, and hence they had different 
kinds of hunger. 

49 Q. The mixing of savage tribes creates the 
first advance in desire ; that is to say, a savage 
wanting mere quantity in food advanced to a 
savage who had a desire for quality? 

A. Yes; and as nature Was bounteous, sav- 
ages could develop the beginning of new de- 
sires with but little work, and when new wants 
first began they multiplied with what they fed 
upon. 



20 The Sphinx Catechism. 

50 Q. The plan of nature is, then, to add to 
human hunger rather than to appease the appe- 
tite? 

A. Yes; as new desires multiply and as the 
means to gratify them increase, new hunger is 
born in a myriad of forms, and at the same 
time money develops, takes upon itself an 
objective value, and becomes the only power by 
which each and every one of a thousand kinds 
of hunger may be speedily and easily supplied. 

51 Q. So the modern commercial craze for 
money is wholly natural? 

A. It does not follow that because men fight 
upon the deck of a sinking ship and trample 
down the women and children in order to save 
themselves, that such brutality is natural; so 
also with the modern struggle for wealth, the 
desperate need for money will revive all the 
savage instincts and creates a savage struggle 
to get money, which should be easily secured 
on account of industry and morality. 

52 Q. Money comes into the problem because 
it alone provides the means to satisfy thou- 
sands of new desires, and the hope of securing 
money causes men to endure, to suffer and to 
labor in the modern world? 



Profits. 21 

A. Yes; and when common laborers are un- 
able to gratify new and higher desires, and 
when they must be content with quantity rather 
then quality of satisfaction, nature forces them 
again to become indolent, careless and irre- 
sponsible savages. 



Chapter IV. 
INTRODUCTION OF MONEY. 

53 Q. You answer that profit is the key to 
the arch of industry, and that the introduction 
of money has made the problem of profits the 
riddle of the Sphinx? 

A. Yes; the circulation of money not only 
makes the problem of profits mysterious and 
complex, but it makes the growth of profits 
equally difficult to explain. 

54 Q. How does it happen that profit depends 
upon money rather than upon goods sold? 

A. Money being so much more desirable than 
any other particular commodity, the owner of 
money will not part from it unless he can get 
more money when he sells than when he buys. 

55 Q. The profit proposition is based, there- 
fore, upon the fact that everything labor pro- 
duces must continually and regularly sell for 
more money than it cost? 

A. Yes; or, to be more precise, there should 
be a greater demand from labor in every line 
than the cost of supply in each line, so that 



Introduction of Money. 23 

labor may always sell its product to other 
laborers in every market for more than it cost. 

56 Q. If this condition could be made uni- 
versal, and if prices were held to such a stand- 
ard, it is hard to discover what more would be 
required to solve the labor problem. Is there a 
natural law by which everything labor can pro- 
duce will always sell for more than it cost? 

A. Yes, there is such a law. 

57 Q. Will you state the law as simply as 
you can ? 

A. It is the law of a division among laborers 
whereby a few laborers produce more than they 
need and have a surplus which will supply as 
many more laborers. 

58 Q. If half the laborers produce the food 
and clothing which everyone must have in about 
equal quantity, then you have twice as many 
buyers as you have sellers, provided the buyers 
can get the money? 

A. You have hit upon the point where profit 
is linked up with the money, namely, the buyers 
must get money first before the price of goods 
has any meaning; goods must be able to sell, 
and in order to sell the buyers must get money 
first. 



24 The Sphinx Catechism. 

59 Q. Suppose the buyers get money by work- 
ing for it, then there is twice as many dollars 
in the food and clothes market as was paid to 
labor for making them? 

A. Yes ; and that situation provides a selling 
price higher than cost price for everything 
labor produces. 

60 Q. So far we have a selling price that is 
double the cost price, provided there has been 
a previous distribution of money among con- 
sumers ? 

A. The paradox of political economy arises 
on this account and is as follows : Labor must 
first produce goods before it can secure money 
to buy them, but goods must first be sold to 
labor before money may circulate to pay for 
them. 

61 Q. The paradox appears to be a stone-wall 
difficulty; how is it explained? 

A. It is explained by credit ; labor works for 
capital on credit, and produces about one 
month's supply of goods before it is paid. This 
lag in wages enables goods to be sold on credit 
and paid for as labor is being paid. 

62 Q. This credit, however, involves a consid- 
erable quantity of money, and since goods sell 



Introduction of Money. 25 

for twice the first cost, there must be some law 
by which a corresponding volume of money 
goes into circulation before it returns from the 
consumer ? 

A. The quantity of money in circulation is of 
the greatest importance, and is controlled by 
natural law. 

63 Q. What is the first or primary set of 
facts one needs to understand before the quan- 
tity of money may be taken up? 

A. The quantity of money is not easily ex- 
plained, because the amount of money increases 
by a process of growth which is evidently con- 
trolled by the natural laws which bring about 
growth in the organic world. 

64 Q. But we know that organic growth 
springs from seeds properly planted, without 
being required to know how or why. May it 
not be the same with money? 

A. Yes; but money has been so mistakenly 
discussed that the main difficulty is to remove 
the old ideas. 

65 Q. What is the first error concerning 
quantity of money? 

A. It is that prices of goods are determined 
by the quantity of money. 



26 The Sphinx Catechism. 

66 Q. Is not this correct? 

A. No, because the quantity of money is de- 
termined also by prices of goods. 

67 Q. How can you affirm that prices depend 
upon the quantity of money, and then reverse 
the problem and say that the quantity of money 
depends as well upon prices? 

A. It is like a chicken producing an egg and 
the egg produces another chicken. On this 
account the money question has caused an end- 
less discussion over prices which in effect is 
discussing which comes first, the egg or the 
hen. Price is not a simple fact, but is a com- 
pound one, like weight, and depends upon the 
combined effect of the action and reaction of 
money, the egg and the hen and the hen and 
the egg. 

68 Q. It is commonly believed that price is 
the result of demand and supply? 

A. It would be more to the point to say that 
price was demand and supply. When demand 
and supply is coupled together you have the 
action of money in the hands of buyers and its 
reaction in the market establishing prices. 

69 Q. That is clear so far, but to get to our 
point. A given volume of money in circulation 



Introduction of Money. 27 

will establish a given standard of prices for a 
certain volume of goods. Now it is maintained 
that this quantity of money is no more impor- 
tant than to help along trade. It is claimed 
that a greater volume of money would only 
change prices and require more money for the 
same result, while a lesser quantity would only 
reduce prices. 

A. The weakness of such a theory is that 
credit is given no consideration as a circulating 
medium. Cash and Credit are attached to each 
other, and partake of each other's activity, 
like Siamese Twins ; they move together or fall 
in common. 

70 Q. The advocates who hold quantity of 
money lightly should be asked to explain at 
what point the quantity gains or loses its im- 
portance. If less money merely reduces prices 
without interfering with industry, then the 
question is, how much less ? and if more money 
only changes prices and does not alter civiliza- 
tion, again where do we stop? 

A. Yes, because there is an absolute standard 
upon which nature builds or destroys, and 
growth is governed by this standard. There is 
a given nucleus around which an increase grows 
until the size of the unit causes it to divide into 



28 The Sphinx Catechism. 

two, and to each new unit a similar growth 
arises, and each again divides into two. 

71 Q. Do you mean that money obeys some 
such law of fertility as exists throughout the 
organic world? 

A. Yes; increase of money seems to be gov- 
erned by a law of compensation or balance. 
Growth is built in uniform layers around a 
nucleus from the environment until the power 
of attraction in the nucleus is balanced by the 
quantity it may attract, and when the growth 
in size equals the attraction, the entire mass 
divides exactly into equal parts, also dividing 
the nucleus, and in so doing the attraction is 
restored until the weight or size again bal- 
ances, to again divide. 

72 Q. Has this anything to do with the quan- 
tity of money? Has a dollar of money such 
nuclear attraction by which it grows and 
divides into two dollars? 

A. It has; and credit is the vital substance 
which continually rejuvenates the circulation 
or growth of money. 

73 Q. However interesting this may appear, 
it gets away from the point to be explained, 
namely, the relation which the quantity of 



Introduction op Money. 29 

money bears to* the quantity of things to be 
purchased ? 

A. The quantity of money establishes such 
relation; prices for labor change into money, 
and this money creates other prices, and re- 
turns to again become new wages, thus making 
money the undistributed middle of the system. 

74 Q. What are the factors controlling the 
quantity of money ? 

A. There are four factors, the unit of money, 
the unit of labor, the unit of time and the 
object. 

75 Q. That is simple enough ; labor must earn 
money by working during certain periods of 
time, and in doing so certain objects are pro- 
duced which are bought with the money. Quan- 
tity of money is therefore fixed by labor and 
time, and by spending the money earned? 

A. So far correct; but much labor works 
without the work resulting in a definite object, 
and in such case the money itself must contain 
the stored or expended labor force for a certain 
time. 

76 Q. The quantity of money is therefore 
based upon labor time rather than upon the 
objects which result from a part only of this 
labor time? 



30 The Sphinx Catechism. 

A. No and yes ; the quantity of money must 
be increased by nuclear units of labor expended 
during certain units of time in desirable work, 
but this expenditure of labor needs an objec- 
tive. Nature will not permit the volume of 
money to increase permanently unless the 
greater volume gives rise to greater wealth. 
The increase of money is similar to growth in 
the organic world, where seeds represent money, 
and nature can not permit the reproduction of 
more seeds except for growing more plants. 

77 Q. You mean that wealth grows when 
money is properly spent and invested, rather 
than from the niggardly saving of seeds which 
are never planted? 

A. Yes ; money is made up of units, and each 
money unit represents not only a labor unit, 
but also a unit of time, and from this fact 
springs all the difficulty in explaining the 
money question. 

78 Q. Y'ou mean the difficulty of explaining 
the quantity of money, because the quantity 
depends upon two or more factors? 

A. Yes; difficulty in explaining how money 
and credit must grow or decay in company 
with each other; money in the hands of the 
buyer is the force which puts all other forces 



Introduction of Money. 31 

into activity, the same as any other physical 
force, and a quantity of force depends upon a 
unit of force moving in a given direction during 
a given time. 

79 Q. If quantity of money is governed by 
the laws which govern quantity of physical 
forces, it should not be difficult to make the 
subject clear? 

A. It is difficult, nevertheless, because we 
really have no method of determining the quan- 
tity of physical force except by weight, and we 
have no conception of growth in physical forces 
like the problem confronting us in money. 

80 Q. It is clear that physical forces depend, 
for example, on time and speed; that a given 
force, like a horse power, is computed in a cer- 
tain weight lifted one foot in one minute, or 
half the given weight twice as far in the same 
time, or twice the weight in half the distance 
in the same time? 

A. The illustration is correct; and in order 
to understand forces we must have fixed stand- 
ards of weight and time and distance, while 
with money all standards are movable except 
alone the single units of money, represented by 
dollars, dimes and cents. 



32 The Sphinx Catechism. 

81 Q. Suppose a given value must move or 
be consumed by the circulation of money, 
where do the forces come in for the purpose 
of calculating quantity? 

A. A given price represents the force to be 
overcome like weight, and an equal sum of 
money represents the force of labor exerted 
during a given time to overcome the price. 

82 Q. That is to say, the price of wheat rep- 
resents its social gravity or weight, and the 
wheat money represents the labor and time 
required to produce wheat and bring it to the 
market ? 

A. No ; at this point error usually creeps in. 
The price of wheat, like the weight of iron, is 
determined not by wheat labor alone, but by 
labor and credit of all kinds all over the 
world, just like the weight of iron is counter- 
balanced in gravity by the weight of the earth. 

83 Q. That would be clearer if it could be 
illustrated with a particular price, especially 
the price of labor itself? 

A. Take two laborers, for example, getting 
different prices for labor at the same time, 
say, a ditcher getting two dollars a day and a 
lawyer at a trial of a case getting ten times 
as much, or twenty dollars a day. 



Introduction op Money. 33 

84 Q. This is an example of greater labor 
force exerted in the same time, and therefore 
the lawyer accomplishes more than the 
ditcher. 

A. Your answer is the common one, that 
labor of one kind is superior to labor of other 
kinds, but the laws of nature seem to hold to 
the contrary, and they do not allow greater 
prices for labor because one kind of labor is 
superior to another, but require equal labor 
units to be measured in equal units of time, 
which means that lawyer time is paid and not 
lawyer labor. 

85 Q. What is the difference if a lawyer gets 
ten times as much as a ditcher? Why split 
hairs about the results being a saving in time 
instead of a superiority of labor? 

A. It is just this very splitting difference 
that investigators fail to see, and therefore 
they fail to solve the money question or the 
labor question. 

86 Q. But if the ditcher at two dollars a 
day is paid for results, and the lawyer at 
twenty dollars a day is also paid for results, 
the ditcher may become a lawyer and thus 
even things up? 

A. Not to lose sight of the division of a hair, 
nature makes time saving the distinction and 



34 The Sphinx Catechism. 

refuses to consider the quality of labor, be- 
cause the results secured by the lawyer over 
the ditcher may not be owing to lawyer labor 
at all, but may be owing to natural time- 
saving advances in civilization, in which the 
ditcher has a right to share without becoming 
a lawyer or without desiring to be one. 

87 Q. Do you mean to say that nature pro- 
vides an equality in labor and would pay each 
and every workman alike? 

A. No; what nature requires is that the 
gains of civilization shall accrue to mankind, 
and although rewards are provided which cre- 
ate lawyers from ditchers, it is not done for 
the glorification of John Smith, Esq., Attor- 
ney at Law. 

88 Q. But if nature permits the gains from 
progress to be monopolized by individuals 
whom she herself rewards, wherein lies the 
difference? 

A. Nature does not recognize superior indi- 
viduals, but only equal individuals in great 
groups. A group of one hundred thousand 
persons is required before an average man 
emerges from the mass of mankind. What I 
am seeking to explain is this, that nature 
measures the gains in civilization by a time 



Introduction op Money. 35 

standard, and not by a quality of humanity 
standard. 

89 Q. So let it be now explained. But if 
nature is so particular, how does it happen to 
be otherwise in the division among individuals 
where the hardest and meanest work returns 
the least pay? 

A. If you assume that rewards are now 
based upon quality of brain or brawn in the 
individual, you are mistaken. Inferior work- 
men are not now contributing to superior 
intelligence, but our own interference with the 
natural order of development creates unequal 
systems or standards of pay for work, as well 
as unequal distribution of other wealth. 

90 Q. At any rate, greater results produce 
greater rewards in money to fortunate or lucky 
individuals. The fact itself remains, common 
labor gets common pay, however such pay is 
measured, whether by savings in time or by 
inferior humanity? 

A. If you will consider the gains made by 
invention, by new discoveries and by inherit- 
ance from the past, you should be able to 
appreciate how important it is that the circu- 
lation of money should be able to distribute 
such gains to all mankind, and not confine 
them to special classes of men, who would 



36 The Sphinx Catechism. 

thereby gain additions in wealth to add to 
superior intelligence, and would thus impose 
uncalled-for burdens upon the weak. 

91 Q. The gains from labor-saving machin- 
ery is one of the important problems which 
needs to be explained. Where does labor come 
in when benefits from machinery are to be 
distributed? 



Chapter V. 

MACHINERY. 

A. What you call labor-saving machinery is 
not labor-saving, but time-saving. Labor is 
confined to very narrow limits, and when con- 
sidered alone labor may accomplish but little, 
as you may realize by comparing the labor of 
carrying a message of ten words around the 
earth on foot, with sending the. message by 
telegraph. 

92 Q. But with telegraphing the labor has 
been greatly reduced in quantity? 

A. Again you are mistaken, because you look 
at the question from the wrong standpoint. 
What happens from the introduction of the 
electric telegraph is a very tremendous increase 
in messages to be carried, whereby more labor 
is employed than was used to carry messages 
on foot. 

93 Q. You mean that the gain from machin- 
ery in saving time is secured by keeping all 
labor continuously at work? The same labor 
all the time, but with an increasing output in 
progressively less time? 



38 The Sphinx Catechism. 

A. Yes; nature seems to look upon human 
labor as a fixed force, but to look upon time as 
capable of unlimited divisions. A single unit 
of fixed labor may multiply itself by one thou- 
sand when producing the same result in one 
thousandth part of the former time. 

94 Q. This fact is clear, but what has this 
division of time to do with the quantity of 
money ? 

A. It has this to do — a dollar of money, ac- 
cording to the price of a commodity, is based 
upon a fixed unit of time combined with a fixed 
unit of labor. Now if the introduction of ma- 
chinery enables the same labor to increase the 
output tenfold, what then should happen? 

95 Q. Why that is easy; the increase in the 
supply would result in a corresponding fall in 
the price. 

A. But the facts fail to support this ancient 
doctrine ; the theory that an increase in supply 
will lower the price is based upon stationary 
demand, but if the demand keeps pace with the 
supply, the price remains unchanged. 

96 Q. This is true, but what does it lead to? 

A. It means that unless the gain from ma- 
chinery is saved by higher money wages the 
demand can not keep pace with the supply, and 



Machinery. 39 

the price may fall so low as to actually prevent 
the new machinery from being used. 

97 Q. Can you illustrate this point? 

A. Take, for example, a box of matches, hand- 
made, which cost in labor three cents, and sup- 
pose machinery increases the output from one 
box to one hundred with no increase in labor 
cost. 

98 Q. The old answer is that prices of matches 
would fall in proportion to the increase in the 
supply? 

A. But the old answer considers the labor 
element in money only, and neglects the more 
important time element. 

99 Q. Do you mean that the old price of three 
cents should continue and allow ninety-nine 
boxes profit? Where does the consumer come 
in? 

A. The solution lies between the extremes of 
producing one box costing three cents with hard 
labor, or with machinery at higher wages pro- 
ducing a hundred boxes ; there is a wide enough 
margin in a gain of ninety-nine boxes to pay 
labor higher wages, to give consumers cheaper 
matches, and to pay capital greater profits. 

100 Q. Yes, the margin is there, and so also is 
the mystery of the disappearance of this mar- 



40 The Sphinx Catechism. 

gin. Past gains from invention seem to be lost, 
like the ruins of a city in a desert. Labor now 
works harder than ever before, and lives but 
little better than in savage times, while wealth 
has multiplied, and each laborer does twenty 
times as much work as before. 

A. The answer is well put ; the saving in time 
may become a mere gain in time alone, or it 
may become a gain in wealth, and if the gain 
in time fails to increase the circulation of 
money, it will be lost. 

101 Q. Keturn to the match problem. There 
is a gain of ninety-nine boxes, and if the price 
remains the same, then one hundred times as 
much money must circulate to distribute the 
matches. The question seems to be, where is 
the money to come from ? Should it grow auto- 
matically from the dollars planted in the match 
market as seeds? 

A. Yes ; the problem is to increase the volume 
of money corresponding with the free increase 
of matches, so that each laborer will share in 
the gain, and in order to distribute a gift of 
matches, a corresponding gift of money must 
likewise arise and be likewise distributed. 

102 Q. If matches cost three cents a box and 
sell for five cents, and if machinery increases 
the output from one to one hundred, where is 



Machinery. 41 

the increase in money to come from so as to 
buy the increase in matches ? 

A. It may seem unjust to give such enormous 
profits to labor and capital in matches, yet it 
would be equally unjust to get a hundredfold 
increase from match labor without such labor 
getting a gain in something else. 

103 Q. The answer must be found between 
the extremes ; but in order to pay labor higher 
wages and supply capital with profits, the pub- 
lic must be able to spend more actual money 
for matches, however cheap? 

A. Matches will sell naturally at lower 
prices, so as to attract demand, but in order to 
do so the matches which represent a gain with- 
out labor must be accompanied by an equal 
gain in money, and the public must get the new 
matches and the new money on equal terms; 
that is to say, for nothing — without actual cost 
in labor. 

104 Q. To be able to get matches for nothing 
on account of machinery and to get money for 
nothing with which to buy them, is very inter- 
esting, if true? 

A. Machinery may become as automatic as 
the machinery of nature in producing a field of 
wheat, and not requiring the cultivation of the 



42 The Sphinx Catechism. 

soil. A man may start such machines to work 
turning out endless quantities of goods, but 
some way must be devised to distribute goods 
that are free, because the wind and air only 
will distribute itself. In such case a supply of 
money must flow into the hands of each person, 
so he may secure his share in the free distribu- 
tion of goods. 

105 Q. But a man should not get money 
unless he works for it, although goods flow 
freely from automatic machines ? 

A. But if work became the blessing it seems 
designed by nature to become, and if work is 
found to be the true source of happiness and 
contentment, then to require men to work 
would add another benefit from nature instead 
of subtracting anything. 

106 Q. How is this increase in money with- 
out labor to come into existence along with the 
increase in free matches? 

A. The increase in matches from machinery 
means a certain number of boxes without cost. 
Such increase will then depend upon the 
market. 

107 Q. Yes, the market was taking a fixed 
quantity of matches at the old price, and the 
problem is how many more boxes may be sold 



Machinery. 43 

without lowering the price, or how many more 
may be sold at a lower price so as to draw more 
money into the business and pay higher wages 
and higher profits? 

A. The question is correctly stated, and no 
more money may be drawn into this match bus- 
iness unless the new business creates the new 
money. At the old market price demand and 
supply had been equalized by the circulation of 
a definite volume of money; the increase in 
supply of matches comes into market to dis- 
turb this balance. The unit of price was fixed 
by a given unit of labor multiplied by a given 
unit of time for a given sum of money. 

108 Q. You mean that the old price at five 
cents had become adjusted to a standard of 
wages for labor and a standard of value for 
money, which the new supply will be required 
to change? 

A. Yes; the new supply represents matches 
gained without labor, and when the matches are 
sold they equally represent money gained with- 
out labor to the manufacturer. 

109 Q. Is this the place where the time saved 
becomes important? If one dollar represents 
twenty units of labor combined with twenty 
units of time, and equals twenty boxes of 



44 The Sphinx Catechism. 

matches at five cents each, then when the num- 
ber of boxes increases with the same labor to 
one hundred only, we could have a hundred 
boxes selling for Five Dollars by dividing a 
day's labor into one hundred units of time and 
one hundred units of labor measured in 
matches, and instead of twenty boxes at one 
dollar we would increase the volume of money 
to five dollars by equalizing smaller labor units 
with the smaller units of time, thereby increas- 
ing the volume of money in the match bus- 
iness? 

A. Credit comes into existence as a result of 
this increase in matches without an increase in 
labor. Credit extends the old price over the 
new supply in advance of any increase in the 
quantity of money. When smaller units of 
labor may unite with smaller time units for 
each dollar, then the credit may become an 
increase in volume of actual money. Unless 
this gain in time saved becomes an increase in 
wages, it is lost to labor, and it permits men to 
gain wealth without labor by creating debts to 
offset this extension of credit. 

110 Q. Suppose the manufacturer is able to 
sell the surplus matches at the old price, get- 
ting the gain as a profit, which so far has no 
element of labor in it, at what place or in what 



Machinery. 45 

manner will this credit be joined with labor 
and circulate as more real money ? 

A. Credit becomes real money when it is re- 
deemed in labor on demand by buying any labor 
product in the market, and when the profit 
from the surplus matches is spent to employ 
labor, then labor unites with time credit and 
increases the volume of money. 

111 Q. You mean to say that all nature asks 
from the factory owner is to have him employ 
labor for any purpose with the profit he re- 
ceived ? 

A. Yes; but you must not jump to conclu- 
sions; the market will not absorb the extra 
matches unless this credit is somehow put into 
circulation and is kept in circulation by the 
production and consumption of matches. 

112 Q. But there is nothing else the manu- 
facturer may buy? 

A. Yes ; he may buy land or invest in a debt 
against future labor. 

113 Q. The factory owner must, therefore, 
sell the surplus matches on credit and wait for 
the credit to establish its own circulation by 
paying labor in bank checks and buying mate- 
rial in the same way; putting out matches on 



46 The Sphinx Catechism. 

credit is merely waiting to exchange surplus 
matches for some other surplus coming to mar- 
ket, and to do so by a new circulation of bank- 
check money? 

A. Yes; the problem is as simple as paying 
labor with scrip and redeeming the scrip with 
matches; then, as the quantity of matches in- 
crease, they are followed by a similar increase 
of scrip in the hands of labor. 



Chapter VI. 
INFLATION OF THE CURRENCY. 

114 Q. You appear to simplify the money 
question by the introduction of scrip ; why not 
advocate a free issue of money on a scrip basis, 
wherein each employer of labor creates his own 
money to be redeemed in goods after the man- 
ner of coal and other companies employing 
labor? 

A. The illustration may be instructive in 
showing the limits between two kinds of money, 
cash and credit ; between money fertilized with 
labor and money waiting to be so fertilized. 

115 Q. May not money in the form of scrip 
be used as an illustration and thereby explain 
the principles of circulation and of the increase 
in volume? 

A. The illustration may be made to a limited 
extent ; the scrip issued by coal and other com- 
panies is for one dollar, two dollars or five dol- 
lars, with cents on the margin of the scrip to 
be punched out as the scrip is redeemed in the 
company's store. 

116 Q. Is such scrip real money as far as it 
may be used? 



48 The Sphinx Catechism. 

A. Yes; it is the most simple and perfect 
form of money in existence, exactly filling the 
particular demands for its use. 

117 Q. Assuming that time-labor, as you say, 
is the basis of each dollar of money, and allow- 
ing the prevailing measure of dollars and deci- 
mal fractions thereof to remain, suppose each 
employer of labor was permitted to freely issue 
scrip, provided he gives ample security to re- 
deem his scrip with goods sold, how far would 
the system work? 

A. If the system of scrip currency was ex- 
tended from the employer to the general mar- 
ket, the buyer of goods would also pay in scrip, 
but he would not be allowed to issue more scrip 
than he employed labor at the ruling rate. 

118 Q. How would the buyer of goods secure 
scrip ? 

A. To guard against counterfeiting a system 
of scrip clearing houses would be necessary, 
and they must become as plentiful as banks are 
at the present time, and in such clearing houses 
the surplus scrip of all kinds would accumulate 
before it was redeemed, and buyers of goods 
would secure scrip from clearing houses, as 
they now secure money from banks. 



Inflation op the Currency. 49 

119 Q. But the proposition is to have the 
scrip directly redeemed in goods? 

A. To redeem directly is impossible, for in 
its most simple form there is always a certain 
quantity of scrip outstanding. 

120 Q. Then as the right to issue scrip was 
extended, the quantity outstanding would nec- 
essarily accumulate? 

A. Yes; the quantity outstanding would de- 
pend upon the same forces now at work and 
would be fixed by the time taken by labor to 
spend its earnings, and by the time required for 
wealth to be distributed. 

121 Q. If scrip was issued to labor every day 
for work, there would necessarily be an accu- 
mulation which would increase until the sum 
cancelled each day just equalled the sum 
issued ? 

A. Yes ; if there was not a continual inflation 
of such currency. 

122 Q. While the volume of scrip is accumu- 
lating, there is also accumulating a store of 
goods, and the manufacturer who may issue 
free scrip is being furnished with capital with- 
out cost? 

A. Yes; but all capital is thus freely fur- 



50 The Sphinx Catechism. 

nished ; the difficulty is to discover the process 
of its growth and distribution. 

123 Q. A free issue of scrip would then prac- 
tically supply the same volume of money we 
have now, but where would the general govern- 
ment come in on this scrip issue? 

A. The general government would also be 
limited to the labor it employed and would be 
compelled to redeem its own scrip in taxes. 

124 Q. Suppose, for example, such a general 
scrip issue was made legal in the United States, 
the general government printing a uniform 
scrip, but which is issued only for labor em- 
ployed and is redeemed in the retail market, 
and suppose, also, the government provided 
safeguards and clearing houses. What is there 
in the natural laws of circulation to interfere 
with the free issue of such a form of currency ? 

A. The first difficulty would arise in the 
waste of time in punching out fractional parts 
of a dollar, and the government would be asked 
to issue its scrip in such fractional metal coins 
as would remain in circulation, and" which 
would increase in quantity until the demand 
for change was satiated. 

125 Q. That is apparent, because the frac- 
tions of a dollar being in metal coin, redeem- 



Inflation op the Currency. 51 

able in taxes, would at once do away with the 
difficulty of punching scrip and with fraud 
it would invite. What next? 

A. The scrip issued by the general govern- 
ment, redeemable in taxes, would have many 
advantages over the local scrip of the ordinary 
employer of labor, and would pass current with- 
out the necessity of a frequent return to clear- 
ing houses, and such scrip would gradually in- 
crease and displace the free money. 

126 Q. In fact, then the general result, under 
the most favorable auspices, would force us to 
return to the money which we now have and 
which has been slowly developed in the history 
of society? 

A. Yes ; the money we now have is suited to 
its purpose; the trouble with our finances is 
outside of the kind of money we have. 

127 Q. But a free coinage of scrip in compe- 
tition with the money issued by the government 
might provide a very valuable safety valve. 
Would it not have a tendency to make all local 
money equal to or superior to government 
money? Would it not stimulate the general 
government to improve its own finances and 
prevent a monopoly in banking? What objec- 
tion is there to competition in coinage, if a 
safe money was guaranteed the people? 



52 The Sphinx Catechism. 

A. The great objection would be found in not 
knowing where to stop the continual inflation 
of scrip, which would substitute an artificial 
system for a natural one. 

128 Q. But the necessity of constantly re- 
deeming the scrip with goods and sending scrip 
to clearing houses seems to provide a balance 
wheel for the system? 

A. The system seems complete, because all 
theories and estimates must have a stable foun- 
dation of prices upon which to build ; hence the 
calculation of safety is based upon a foundation 
which experience demonstrates has no exist- 
ence. The attempt to build a firm financial 
structure upon the shifting sands of changing 
prices has caused the failure of each inflation 
of money in the history of the world. 

129 Q. But scrip going out from each em- 
ployer and being redeemed by the same em- 
ployer, would certainly hold prices in check by 
the same law of redeeming money which is now 
in operation ? 

A. When the scrip circulates in the market, 
there must remain out a definite volume which 
is never redeemed, and it is the inflation of 
this surplus which causes trouble. 



Inflation op the Currency. 53 

130 Q. Why would this volume of permanent 
money be inflated out of its true proportion ? 

A. Every circulation is based upon stable 
prices, and the moment free coinage is per- 
mitted the general issue of scrip would call out 
an inflation which would advance prices, and 
this advance in prices would hold out a corre- 
sponding increase in the body of money, and 
this increase would then permit another infla- 
tion, again advancing prices, and thus again 
making room for a greater volume of never to 
be redeemed money, and this process would 
continue until such money falls and pulls the 
business structure down with it. 

131 Q. You are now illustrating the necessity 
of a gold standard which will prevent such a 
series of inflations? 

A. Not a gold standard. 

132 Q. But you demonstrate that the cur- 
rency system must have a standard of value? 

A. Yes ; but we have a standard of value all 
the time, a natural standard, not an artificial 
and shifting one. 

133 Q. Must not the human law provide the 
standard of value in the currency? 

A. No; the human law must adopt a system 
of measures, as it adopts a uniform system of 



54 The Sphinx Catechism. 

weights, but the human law can not fix any 
standard of value. 

134 Q. All the statute may do is to say the 
currency shall consist of dollars, dimes and 
cents, and depend upon the laws of trade to 
regulate values and standards? 

A. Yes ; the volume of money going into cir- 
culation must meet some natural resistance by 
which the same volume returns to its starting 
point and describes a circle which determines 
its quantity. 

135 Q. Volume and weight in physics seem to 
depend upon laws of action and reaction. Does 
the same law fix the quantity of money? 

A. Yes ; the standard of value is determined 
by the law of action and reaction in money, the 
same as action and reaction with any physical 
force. The entire volume of money must circu- 
late and turn over within the time fixed by 
natural law. The volume of money must be 
paid out, creating a supply of purchase power, 
and must be spent creating demand. 

136 Q. Need the time on -one side exactly 
balance the time on the other side, so that the 
sums paid for goods and the sums paid for 
wages are each paid in equal times? 



Inflation of the Currency. 55 

A. Yes; and here is where the credit and 
secondary money comes in and provides an 
elastic medium for shifting prices, and for 
changes in time. 

137 Q. Granting the necessity for a natural 
standard of value, suppose you demonstrate 
just where scrip would fail to make a closed 
circle and leave a continual surplus outside, 
requiring a constant shift in the measure of 
value? 

A. While free money is being issued to pay 
labor, there are two distinct classes of laborers 
employed who create two distinct classes of 
wealth, and only one class of this wealth may 
be used to redeem scrip, and to pay secondary 
labor with scrip would cause a continual accu- 
mulation of such scrip. 

138 Q. You mean by this that scrip would be 
paid, for example, for building a railroad and 
would be redeemed in commodities, leaving the 
railroad itself outside the circle of exchange? 

A. Yes; and let me ask how the railroad 
builder would be able to redeem his scrip ? 

139 Q. Why he would sell the capital stock 
of the railway for scrip and cancel the scrip ? 

A. But here you neglect the standard of 
value, for there would be no buyers for his rail- 



56 The Sphinx Catechism. 

way stock; there are only buyers for com- 
modities. 

140 Q. Why so; in building a railway the 
money was increased equal to the cost of the 
railway, and this money should be available to 
buy it back? 

A. It is true the volume of scrip is increased 
to cover the cost of the railway, but such money 
increases prices in the commodity market and 
refuses to supply a single dollar outside of the 
commodity market with which to buy the rail- 
way securities, except it does so by creating a 
debt. 

141 Q. Please explain where this mystery in 
redeeming money by labor comes in? 

A. It is a question of time units failing to 
unite with the proper labor units in creating 
the required volume of railway money. 

142 Q. Do you mean the railway is produced 
without cost, and in order to have a price and 
find buyers it must bring into the market a 
gain in money like surplus matches? 

A. Yes; the scrip issued to pay for labor 
and material in building a railway becomes 
money becauses it buys commodities and closes 
the labor account in the commodity market, 



Inflation of the Currency. 57 

leaving the railway outside as a gain, the same 
as if it came from machinery without labor. 

143 Q. Then the railway represents a new 
accumulation of commodities in a new form, 
which may or may not save time, depending 
upon its successful operation in the future; 
the cost of the railway in labor and material 
must become the basis of new credit, and the 
railway must unite its own saving in time with 
new labor in its own operating department, 
and the labor employed by the railway must 
become the basis of money to buy the railway, 
instead of such money arising from the labor 
producing the railway. Is this the situation? 

A. Yes; prices for railway property must 
come from the exchange of railway labor with 
other labor by the production and sale of trans- 
portation. Selling transportation at a higher 
price than is paid to produce it will create a 
considerable margin of profit, and this profit 
becomes new bank deposits independent from 
other profits, and will accumulate a volume of 
bank money equal to the needs of the railway 
business. 

144 Q. You mean that a secondary profit 
arises which can not return directly to its start- 
ing point as cash constantly returns in wages, 
but must pass through a bank and create a cir- 



58 The Sphinx Catechism. 

dilation of checks redeemable in money on de- 
mand? 

A. Yes; the increase of prices in the primary 
market can only hold up when the profit from 
goods is spent to employ labor for secondary 
work. The secondary product is outside this 
circle and sells for an equal price, but the profit 
from this secondary price can not go upward 
to a third tier of laborers, as profits from goods 
go to other laborers, but must return to the 
beginning and increase the entire wage fund. 

145 Q. Then each price in the market depends 
upon a definite volume of money which circu- 
lates in a definite period of time, creating stand- 
ards of value, as follows: In the commodity 
market the short periods of time can all be in- 
cluded within a closed circulation of a limited 
volume of money, but the longer time and the 
many changes of capital require the independ- 
ent circulation of credit? 

A. Yes ; one day's supply of cash is extended 
for as many days as may be required to meet 
the demand and until as much cash is released 
by consumption as is required for daily produc- 
tion; but in the capital market the situation 
changes; not only must the co-operation of 
labor be taken into account and joint wealth 
be distributed to contributing laborers, but 



Inflation of the Currency. 59 

some operations of capital are successful, while 
others fail, and changes occur which are inde- 
pendent of commodities, and which must be 
equalized by corresponding changes in volume 
of money. 



Chapter VII. 
SECOND ABY MONEY. 

146 Q. Kailway and other utilities are con- 
sumed in practically the same time as commodi- 
ties. May not cash circulate to pay wages to 
labor creating such utilities and the cash 
money be redeemed by transportation and like 
services ? 

A. The answer is both yes and no. Checks 
have two functions, while cash has but one, and 
checks act as cash when the price of utilities is 
included within the commodity price, but the 
increase in the commodity price which carries 
the price of transportation is based upon bank 
checks and is independent from the cash in 
circulation. 

147 Q. Since the railway business must be 
supplied with bank checks, and as such money 
can not come into existence from an inflation 
of cash, and since you deny that capital need be 
saved, where does capital originate ? How does 
it get a beginning and then increase? 

A. The answer is that capital originates from 
primary profits which are paid by the consumer 
of goods. 



Secondary Money. 61 

148 Q. Primary money is not then capital? 

A. No primary money is cash, while capital 
is credit payable in cash on demand. 

149 Q. But the volume of primary money 
must also increase with the increase in wealth, 
and retail profits must first supply this gain? 

A. The increase in prices of goods operating 
against a closed circulation of money, is like 
the increased growth of an organism around a 
nucleus, which growth soon balances the attrac- 
tion and causes a separation into two equal 
parts. So with commodities, the dollar em- 
ployed in production soon results in more goods 
than one dollar will market, and the surplus 
goods split off, seeking new buyers with new 
money. 

150 Q. The old volume of money in circula- 
tion fixes the amount of attraction one dollar- 
did possess for one dollar's worth of a particu- 
lar commodity? 

A. Yes; and when a surplus appears it is 
split off, because the amount of goods to be 
attracted by one dollar has increased so as to 
require more dollars to take up new goods. The 
new goods, when they split off, have only an 
imperfect dollar contained within them, which 
is a credit dollar, and which must be fertilized 



62 The Sphinx Catechism. 

by uniting with labor before a true and new 
dollar comes into existence. 

151 Q. The increase in primary money is a 
first charge upon the quantity of money; is it 
not? 

A. Yes; the profits in the primary market 
pass through a bank, where one dollar in cash 
creates two or more dollars of credit. A part of 
this check circulation supplies the increase in 
cash until the actual cash circulation expands 
from the introduction of new money. 

152 Q. This primary credit seems to be ahead 
of capital in some way, because if crops fail 
there seems to be a general decline of capital 
all over the market? 

A. Yes; the first demand upon the circula- 
tion of money is made by commodities, and this 
demand supersedes capital, because commodi- 
ties consume the cash in circulation, leaving 
capital depending upon credit payable in cash. 

153 Q. An increase in quantity of money is 
based upon finding gainful occupations for the 
labor not required for commodities? 

A. Yes; when half the total labor produces 
the primary supply, the laborers thus relieved 
are expected to create an equal wealth to ex- 
change for commodities, so that one unit of 



Secondary Money. 63 

primary labor will exchange on equal terms 
with a unit of secondary labor. 

154 Q. With secondary labor fully employed, 
will the commodity market furnish a continu- 
ous profit equal to the wages of secondary 
labor, because goods sell at twice the primary 
cost? 

A. Yes. 

155 Q. Suppose a merchant who is accumu- 
lating a profit every year becomes a money 
lender, instead of buying more goods and ex- 
tending his trade. How does money lending 
affect the currency ? 

A. Interest is the attraction which keeps 
money in circulation, and at the same time 
leaves a gain with the merchant which becomes 
the basis of more credit. The borrower goes 
into business with money borrowed from the 
merchant, and pays him not only the interest 
but the principal from the profits of the busi- 
ness. When the loan has been paid the credit 
is set free to help another to start into business, 
and in this manner cash continues in its own ' 
channels, while bills of exchange accumulate in 
every direction. 

156 Q. Loaning or investing retail profits, 
then, furnishes the capital for building? 



64 The Sphinx Catechism. 

A. Yes ; capital goes into building as though 
the building was a pile of newly-created goods, 
which, however, can not compete with commodi- 
ties, because differences in the time of circula- 
tion creates two independent standards of 
value, one for goods and the other for capital. 

157 Q. If the primary profit was used to erect 
buildings that burned down as soon as com- 
pleted, would there be a continuous market for 
commodities, a continuous employment for 
labor, but no capital and no volume of money 
by which capital could be maintained? 

A. Yes ; and the converse of your proposition 
is also true; if gainful buildings are created 
during periods of prosperity, and fill the world 
with riches, and if credit is then contracted, the 
wealth of buildings and improvements would 
be practically destroyed, would be deserted and 
fall in ruins, as from a fire. A failure in the 
circulation of money after wealth has been cre- 
ated has the same effect as a failure of money 
to arise in order to create the wealth. 

158 Q. The point I would draw out, however, 
is that nature will not long permit buildings to 
be erected only to be destroyed, although a 
temporary loss of this kind may be permitted 
to teach mankind how to build profitably. 
What is the plan by which we keep on building 



Secondary Money. 65 

better than before, supplanting old buildings 
with new and better ones ? 

A. The plan is to offer a bonus to the builder, 
consisting of the entire selling price of a profit- 
able improvement. 

159 Q. How the entire selling price instead of 
the price above cost? 

A. By borrowing the cost price and by sell- 
ing at a profit and repeating, or by borrowing 
the cost price and by waiting until profits repay 
the loan. 

160 Q. Must capital sell for twice its cost, 
like goods, in order to sell continuously to 
labor, and in order to sell as much as may be 
produced ? 

A. Yes; a building or other improvement is 
a pile of commodities extended as a credit over 
a longer period of time. 

161 Q. Will the double price of buildings de- 
pend upon a quantity of bank-check currency? 

A. Yes, because there is no third level of em- 
ployment where the profits from capital must 
be used as wages; hence they first supply a 
currency with which to buy capital at twice its 
cost price before wages are permitted to ad- 
vance. 



66 The Sphinx Catechism. 

162 Q. The workers in primary markets get 
wages in cash which will buy half the primary 
product at twice its cost; that is to say, they 
get wages equal to the whole product at cost. 
The remainder of the primary product goes to 
secondary workers who also get equal wages in 
cash, thus creating a cash market for commodi- 
ties, but only accounting for the product of half 
the workers ? 

A. Correct. 

163 Q. Capital arises from primary profit 
being used to employ secondary labor, and this 
secondary labor in part is engaged in creating 
more capital, part is maintaining existing cap- 
ital, while another part is operating capital in 
factories, in railways, in schools, and thus sup- 
plies the country with secondary service, like 
transportation, heat, light, teachers, lawyers, 
government and the like? 

A. Yes. 

164 Q. This leaves out of calculation any ex- 
change of services between the primary and the 
secondary laborers. Am I right so far? 

A. You are. 

165 Q. Since equal units of labor in equal 
times should give rise to equal volumes of 
money, the laborers employed by capital should 



Secondary Money. 67 

originate a wage circulation of bank checks 
equal to the circulation of cash. Is this correct? 

A. It is. 

166 Q. This quantity of wage checks, how- 
ever, does not buy capital, but buys the services 
of secondary labor in the form of transporta- 
tion, water, heat, light, taxes, amusements, 
luxuries, travel and other secondary services? 

A. You are right. 

167 Q. This secondary check circulation is 
redeemable in cash on demand for the same 
reason that a gold standard is required to pre- 
vent an inflation of currency, to hold down the 
quantity of checks to the standard of value in 
the commodity market? 

A. Yes; the almost unlimited freedom with 
which nature permits credit to be borrowed 
requires a strict regulation of the volume of 
bank checks, and requires a standard of value 
for them, the same as for cash. 

168 Q. The bank checks in the secondary 
wage fund should at least equal the volume of 
cash paid as primary wages, so that the sec- 
ondary workers may supply the primary work- 
ers with bank checks in exchange for the cash 
they get from them, and by this exchange the 
primary workers may buy with bank checks as 



68 The Sphinx Catechism. 

much secondary service as they sell primary 
service? 

A. You state correctly the manner in which 
the wage fund should round itself out. 

169 Q. Now aside from capital, which you 
say is a borrowed fund and must always remain 
a credit, what becomes of the bank profit from 
this secondary half of wages, when transporta- 
tion and like utilities sell at twice the cost ? 

A. This secondary bank profit gives rise to a 
new volume of circulating capital, by which 
wealth is distributed to individuals — I mean 
fixed wealth, ^hich pays an incume. 

170 Q. Does capital get its price from the cir- 
culation of certain secondary bills of exchange 
we call capital stock, which circulates inde^ 
pendent of the money in the wage fund, but is 
connected with it by exchanging such securities 
for money? 

A. Yes; there can be no increase in wages 
from an increase in capital itself; they are 
absolutely limited by the product of labor sell- 
ing to laborers, and wages are consumed as 
fast as they are produced. 

171 Q. Wealth seems to grow in pyramid 
form, or to grow like a tree ; the central growth 
proceeds from dollars of cash paid out as the 



Secondary Money. 69 

cost price of commodities, and the first ring of 
growth outside of this central core is made up 
of another layer depending upon a surplus com- 
ing from the central growth; from this trunk 
numerous branches are thrown off, supported 
from the tree, but the entire growth must be 
maintained by sending out working roots in 
the soil, which balance the credit branches 
spreading in the air? 

A. The illustration is correct; wealth de- 
pends as much upon the vital circulation of 
money as the growth of a tree depends upon its 
sap. 

■fc J y \ 

172 Q. Commencing at the foundation, ex- 
plain the growth in quantity of money, and the 
growth of one or more credit dollars attached 
to each primary dollar? 

A. At the foundation is the labor cost of the 
food supply, which constitutes the central core 
of the cash transaction. When money is paid 
to labor to produce food, the profusion of 
nature gives a surplus, which becomes the basis 
for an increase in money equal to the gain in 
food. This surplus in food enables the laborers 
not required to produce food to be paid for 
other work, so as to buy food while they are 
creating new wealth. 



70 The Sphinx Catechism. 

173 Q. This description so far takes into ac- 
count only the cash, which will always circu- 
late, in good times or bad times ? 

A. Yes ; there is a central vitality which must 
be protected by nature at all hazard, and it is 
this central source of vitality we are seeking to 
set apart from any gain. 

174 Q. The moment a gain above subsistence 
arises, the fecundity of money makes its growth 
felt. Is this power the same whether the money 
grows from an increasing supply of food or 
from new capital? 

A. In whatever direction cash circulates, 
whether in the field or in the shop or in the 
bank, the central heart pulsates with cash 
based upon labor cost, and flowing out from the 
heart through its channels, new supplies of cash 
start new supplies of credit into living activity. 

175 Q. I am beginning to understand this 
growth of money. The necessary dollar which 
pays for subsistence gives rise to an offspring 
dollar from an increase in subsistence, which 
dollar may or may not have the reproductive 
power? 

A. The primary circulation is doubled when 
each one dollar has a primary credit dollar at- 
tached to it, and thus union permits each of 
the two to create a second pair of credit dol- 



Secondary Money. 71 

lars, which gives rise to a secondary circula- 
tion equal to the combined primary circulation. 

176 Q. Advancing from the primary growth 
of money to the crop of secondary dollars, tell 
me how this second crop originates? 

A. It originates largely or almost wholly 
from trade, whereby a surplus of goods at one 
point is traded for a surplus from another 
point ; trade permits wealth to grow, instead of 
allowing it to waste. 

177 Q. But you say capital is required to 
bring this second series of dollars into exist- 
ence? 

A. Yes; when once the line of growth is 
established by trade, and the common surplus 
from the soil at one place is traded for a dif- 
ferent surplus from another place, it opens up 
new and unlimited possibilities in creating 
wealth. 

178 Q. How opens up new possibilities? 



Chapter VIII. 

CAPITAL. 

A. When a new surplus of one kind may be 
traded for a surplus of another kind, then cap- 
ital may invent new supplies and may create its 
own money. For this reason anything may be 
produced which any individual may fancy. 

179 Q. What I want particularly explained 
is capital itself, as distinct from labor. You 
say, for example, that primary circulation is 
always a closed circle, which, however, enlarges 
by taking into it more primary money, but the 
expansion of money grows in the secondary 
field and thereby makes capital necessary for a 
large part of wages. I want this distinction 
between capital and labor made clear? 

A. How made clear? 

180 Q. Is there a similar closed circle in the 
credit part of the wage fund, so that this ex- 
panding money is also limited in volume? 

A. Yes ; but the credit in the wage fund is a 
part of another larger circle in the capital fund, 
which is based upon profits instead of wages. 
Capital money is very elastic, and its volume is 
regulated by the rate of profit. 



Capital. 73 

181 Q. How does the rate of profit provide 
elasticity in the volume of credit money? 

A. As the rate goes up the price of capital 
diminishes and limits the field of circulation, 
and as the rate goes down the price rises and 
makes room for a greater volume of money. 

182 Q. You mean that different kinds of cap- 
ital pay different rates of profit, and the change 
in the rate regulates the volume of money by 
differences in speed of circulation? 

A. Yes ; a ten per cent, rate for one hundred 
dollars has a ten-year speed, while a five per 
cent, rate has a twenty -year speed of circula- 
tion, and there is a wide average rate which is 
very sensitive, because a change from six per 
cent, to four per cent, in the general rate makes 
room for one- third more money by an advance 
in prices without an increase in wealth. 

183 Q. Going back to the point where an in- 
crease in the wage fund begins, and admitting 
the increase in money must come from an ex- 
pansion of credit currency, it is easy to see 
that bank checks when used as wages would 
circulate in less than a year, and in this way 
would be much superior to longer credit. The 
slower circulating capital could offer no obsta- 
cle to being continually absorbed by the quicker 
credit in the wage fund. The increase in wages, 



74 The Sphinx Catechism. 

therefore, may always find ready money by 
drawing upon the volume of bank checks in 
circulation unless something outside may inter- 
fere. Am I correct in this? 

A. You are correct. 

184 Q. Nature will not allow a circulation of 
money for capital, unless such capital saves 
time in production and trade, whereby the units 
of time saved may unite with smaller units of 
labor and create the money; in other words, 
capital will not be permitted to draw its supply 
from the wage fund, while wages may increase 
from the profits of capital? 

A. Yes; but wages can not draw upon the 
body of capital, and the old theory that wages 
come from capital is false, but the profits from 
capital must go into the wage fund. Capital 
must originate from some gain in trade inde- 
pendent from the gains made by labor in pro- 
duction, yet capital must be inseparably con- 
nected with production, and it is trade which 
supplies this connection between labor and 
capital. 

185 Q. How does capital save time independ- 
ent from labor? 

A. The difference between labor and capital 
is made by the time saved in production com- 
pared with the time saved in trade. 



Capital. 75 

186 Q. This again seems to be injecting some- 
thing new and to wander away from the money 
question ? 

A. Not at all. Money supplants barter as 
soon as trade becomes of enough importance to 
require the aid of capital. 

187 Q. You say the difference between labor 
and capital is a difference in time gained by 
labor in production or time gained by capital in 
trade. Please explain just what you mean? 

A. Gains in production arise from improve- 
ments which increase the output, while gains 
in trade arise in marketing the output; in 
making a surplus at one place equalize in value 
with a surplus at a different place. 

188 Q. Illustrate this idea of capital? 

A. Capital arises with the first pedlar who 
takes up a pack of almost worthless goods from 
an unsalable surplus and trades them where 
they are scarce for an equally unsalable sur- 
plus at that point. 

189 Q. In this form the pedlar-capitalist is of 
considerable benefit at each end, is he not? 

A. In this form he is a benefit only to him- 
self ; for, like the trader getting valuable ivory 
and furs from savages or selling Old Masters 



76 The Sphinx Catechism. 

to multi-millionaires, the reduction in surplus 
at either end is of no particular value. 

190 Q. But would not such gains so increase 
the number of pedlars as to take up the entire 
surplus? 

A. No; the introduction of money and of 
fixed capital changes what otherwise would be- 
come a mere increase of pedlars into an in- 
crease of new laborers. 

191 Q. Is labor at the mercy of capital when 
trading with the individual pedlar? 

A. Yes ; for however free the laborer may be 
in his small circle, and however free his access 
to land, his only hope for gain lies in his being 
able to sell his entire surplus at the cost in 
labor to him of the part he must consume. 

192 Q. This is to say, there is no such dimin- 
ishing margin of usefulness in the surplus 
product as is being claimed by the Austrian 
School of Economists, but a decline in the price 
of the surplus arises from not selling to its 
best advantage, and the diminishing scale of 
prices results from some interference with cap- 
ital? 

A. Yes; a railway system, for example, 
changes peddling into new forms of labor, 
whereby all manner of surplus crops are traded 



Capital. 77 

among a constantly changing and diversifying 
people ; the pedlar works as a railway employee 
on account of the growth of capital. 

193 Q. Instead of allowing an army of ped- 
lars, each having a pack on his back, and an- 
other greater army with trains of horses and 
wagons, capital in some way changes the con- 
ditions; each surplus exchanges with another, 
and creates the value of a railroad independent 
from the value of the commodities? 

A. Yes; the individual pedlar barters goods 
for goods and fixes the value by the load he is 
able to carry away, getting as much and giving 
as little as possible, while capital creates many 
new varieties of goods and permits each unit in 
a surplus of one kind to be valued equally with 
each unit in a surplus of another kind. 

194 Q. This seems clearly demonstrated by 
the fact that civilization was first developed 
along water courses, where this diverse ex- 
change could develop from shipping? 



Chapter IX. 

TRADE. 

A. Capital did originate from shipping, the 
ship taking its load of surplus goods from the 
home market to a foreign port and returning 
with a surplus taken from abroad. In loading 
at home the ship owner buys cheaply and makes 
work for labor in producing his trading stock, 
which he sells at a profit in a foreign port, and 
when he returns he sells at a scarcity price, 
getting a profit at each end of the voyage. 

195 Q. How does money originate, for the 
ship itself and for the markets at each end, 
where no markets existed before? 

A. Whatever cargo the ship may take at 
either end would not otherwise have been pro- 
duced, and the labor would have wasted. The 
return cargo is also a gain ; hence the gain from 
this trade will always equal one cargo one way, 
if both cargoes divide equally between capital 
and labor. 

196 Q. This seems clear, but new money must 
arise to support this labor and trade? 

A. Yes; the ship owner buys the home sur- 
plus with bills of exchange on the foreign port, 



Trade. 79 

agreeing to pay with the proceeds of the return- 
ing cargo, and he does the same at the foreign 
ports, and in this way he creates the money at 
each place to market each cargo. 

197 Q. To get this point clearly in mind, the 
ship owner buys his outgoing cargo with bills 
of exchange upon the foreign cargo, to be taken 
up when the foreign cargo gets to port, and 
when he gets to the foreign port he buys his 
cargo there with bills of exchange on the home 
port. Why all this round-about method ? 

A. This proceeding is necessary in order to 
complete the entire circle of credit circulation, 
which is to produce a market at each end. 

198 Q. Suppose he buys the return cargo with 
the cargo he takes with him by selling it in the 
foreign port ? 

A. It would be impossible unless he sold for 
gold, which would then become an international 
money, and the trade would only last as long as 
the foreign supply of gold held out. 

199 Q. I don't get the idea; the shipper de- 
livers his home cargo to a foreign port and sells 
it and buys his new cargo for the return voyage. 
What is the matter with this statement of the 
case? 



80 The Sphinx Catechism. 

A. If he sells one cargo and buys another he 
must have a market in which to sell before he 
buys, while he has no such market until after 
the foreigner has sold his goods in the home 
market ; hence, in buying the home-going cargo, 
he must buy with bills of exchange, payable 
when he sells the cargo he will bring back, and 
the same condition is found in buying the for- 
eign cargo. 

200 Q. You mean that the trader must have 
this lag in time to originate the circulation of 
money to pay for the cargo the same as with 
the lag in wages? 

A. Yes: and this time required in com- 
merce is the limit in the total time required 
for the circulation of money, making all other 
debts not ouly unnecessary, but making them 
interfere with the circulation of money. 

201 Q. This brings up another new problem 
among many. You have bills of exchange in 
each port taking care of the selling price of 
the imported cargo ; hence you are doing away 
with the balance of trade theory, whereby each 
nation is striving to secure something for 
nothing from every other nation. What about 
the balance of trade theory? 

A. It is a pure humbug, and has no exist- 



Trade. 81 

ence outside of the imagination which gives it 
room to live. 

202 Q. But money flows from one nation to 
another, and one nation gets rich at the ex- 
pense of others, or from trade with other 
nations ? 

A. Money flows from one place to another 
because of the world-wide unequal distribution 
of wealth. It is not on account of trade that 
individuals borrow capital, but to allow men 
in each nation to get rich from an increase of 
indebtedness. Money flows from place to 
place so as to plunge labor everywhere into 
hopeless poverty, to burden them with the 
weight of irredeemable debts. 

203 Q. Each surplus separated from another, 
you say, is joined together by trade, and this 
exchange brings about the growth of capital; 
and is this true of trade everywhere, domestic 
as well as foreign? 

A. Yes; and similar bills of exchange are 
everywhere required to market the goods. If 
trade is within a city or between one country 
and another, the same principle holds good; 
one surplus is balanced by the equal value of 
another, neither of which could come into ex- 
istence without this exchange. 



82 The Sphinx Catechism. 

204 Q. The aid which capital gives to pro- 
duction arises from some kind of a new sup- 
ply being exchanged for some kind of a surplus 
in the old supply, which gives new value to 
each and creates a new volume of money, with 
which labor is able to buy both, where other- 
wise neither would have had a market. Is this 
the correct view of labor and capital? 

A. It is ; and the whole system depends upon 
what may be properly called primary bills of 
exchange, whereby each product is valued at its 
selling price in its own market by a system of 
bank checks redeemed with cash when they fail 
to redeem each other with labor. 

205 Q. How does capital itself circulate in- 
dependent from this marketing of commodi- 
ties? Where does capital find a market? 

A. Starting the growth of capital upon a 
foundation of labor cost, we are required to 
treat the beginning of capital as a pile of sur- 
plus commodities, but capital has a continuous 
life and has a purpose distinct from com- 
modities. 

206 Q. If the owner of a building is to get a 
return of the money it cost him, with a profit, 
must not new money come into existence and 
circulate outside the wage fund, with which to 



Trade. 83 

buy capital, as distinct from buying com- 
modities ? 

A. Yes; the building, however, may become 
a total loss on account of bad location or bad 
construction, or it may become a gain, and this 
difference of its becoming a loss or a gain fixes 
its place in the circulation of money, by requir- 
ing the building to create its own money from 
its own gains. 

207 Q. Haviug the cost price of a building as 
a basis, and the owner being required to wait 
until the building is successful and until it 
originates its own money, then if such building 
sells in advance of this period of waiting, the 
price paid becomes a debt, does it not? 

A. Yes, because labor is not required to wait 
during the time a building demonstrates its 
fitness to survive. 

208 Q. Of what does the waiting of capital 
consist ? 

A. Capital, when engaged in supplying a 
new product like transportation, must wait 
only until a supply of money may get into cir- 
culation ahead of the wages it pays to labor, 
and if capital may then sell its product for a 
profit, this profit at a certain rate will origi- 
nate what may be called secondary bills of 
exchange. 



84 The Sphinx Catechism. 

209 Q. But capital itself is waiting to find its 
own market? 

A. Yes; capital finds its market from a sec- 
ondary accumulation of deposits in banks 
when its own product sells for twice its cost, 
and this capital profit must accumulate be- 
cause there is no third tier of laborers to be 
employed with it. 

210 Q. I am now clear as to this second layer 
of new dollars which limits wages, but the 
money with which capital itself exchanges 
among owners remains to be explained? 

A. The moment capital develops we cut loose 
in a measure from the primary circulation, and 
develop a circulation of capital stock, which 
should sell for cash on demand, and in so sell- 
ing should represent a certain portion of the 
surplus commodities which have become fixed 
and built into the forms we call capital. 

211 Q. This capital money, with which to 
buy shares of capital stock, consists of bank 
checks. What limits the volume of money with 
which capital is bought and sold? 

A. The limit is found in the profits, which 
can not go upward to a third development, but 
must accumulate to buy capital. 

212 Q. We are going too fast ; the point wait- 



Trade. 85 

ing for light is this : When does a man get his 
money back which is profitably invested as cap- 
ital, admitting he must wait? How does this 
waiting account for the return of his invest- 
ment when his original money has passed be- 
yond his control and gets into the wage fund? 

A. His money is returned by the rate of 
profit producing a reserve which will pay cash 
for capital on demand. The sale of transpor- 
tation at twice its cost gives rise to a secondary 
profit which becomes new bank deposits, but 
which can not be used to employ labor in a 
third series, as primary profit must be used to 
employ secondary labor. For this reason this 
secondary profit will inflate bank-check cur- 
rency. 

213 Q. There must be a great expansion of 
money when capital may sell a world of new 
varieties of commodities and services at twice 
the cost? 

A. Yes; but there is also a second standard 
of value by which an indefinite secondary ex- 
pansion of bank checks meets its limit. The 
quantity of profit for a year divides into the 
quantity of capital and fixes a rate of profit 
and a standard of value. 

214 Q. You have capital selling at twice its 
cost, the commodities consumed in a building 



86 The Sphinx Catechism. 

sold originally at twice their cost and the 
building inay be a failure, but when these same 
commodities become capital, they again sell at 
twice the cost? 

A. Yes. 

215 Q. The capitalist, however, has this ad- 
vantage, although he must wait for a circula- 
tion of money to develop, and must wait on 
wages to establish such circulation, when cap- 
ital has been established on a profitable basis 
the perpetual increase in money is open to him, 
while labor is cut out by a natural limit to the 
possible wage fund? 

A. Assume for the time you are correct, that 
the money invested by capital is considered by 
nature as a venture into new fields, which risk 
involves losses to individuals and must also be 
rewarded with exceptional gains. 

216 Q. The point now uppermost in my mind 
is to know how this line originates which 
divides the money circulating as wages from 
the money circulating as capital; or, rather, 
how it happens that the wage fund is limited, 
while capital can grow to the limit of the 
earth's capacity? 

A. Assume that capital has an unlimited ex- 
pansion of money at its command,what is the 
result ? 



Trade. 87 

217 Q. The result is a rise in price of all 
capital in the entire field, while wages remain 
relatively stationary. 

A. And is there no limit to this rise in price? 

218 Q. Capital would not sell unless it pro- 
vided something to be consumed by labor from 
which a profit arises and which profit is paid 
by other laborers; hence capital must in some 
manner be sold to laborers if it sells for cash on 
demand. 

A. Admitting that an inflation of currency 
is bound to arise and also that this fund grows 
all the time, what effect will a volume of ex- 
panding currency have upon capital? 

219 Q. The effect would be a continual in- 
crease in its selling price without any increase 
in cost. 

A. The answer is correct to the point when 
all labor is not fully employed at standard 
wages. 

220 Q. You mean that wages may only ad- 
vance after capital sells for more than twice 
its cost? 

A. Yes; I desire to explain that the selling 
price of capital rises from zero, where it rep- 
resents a mere loss of commodities, to a point 



88 The Sphinx Catechism. 

where capital sells for two or more times its 
cost, and is independent of wages in so doing. 

221 Q. The rise in price above cost creates 
two funds, one fund going to pay labor, the 
other creating capital. Is this correct? 

A. Yes. 

222 Q. This double circulation is independ- 
ent of the success or failure of capital ; but if 
capital results in a new gain to labor, then, in 
addition to the wage fund, from which this 
capital grows, there will arise a new circula- 
tion by which capital itself will be distributed. 
Is this correct? 

A. Yes. 

223 Q. The distribution of wages may be 
said to end when the money spent as cost of 
capital is either wasted or creates new fields 
of employment? 

A. Correct. 

224 Q. Capital advances wages out of other 
wages by being able to extend credit, and its 
own money arises from a surplus above the 
highest wage rate? 

A. You are right; but the higher the wage 
rate the greater the profit to capital and the 



Trade. 80 

easier wages are to pay and the better market 
capital acquires. 

225 Q. While capital is compelled to wait 
for its volume for money, labor may buy its 
own products from the continuous volume in 
the primary circulation? 

A. Yes; but money for capital is as certain 
to come into existence as is the money for the 
wage fund. 

226 Q. The third circulation of money which 
buys capital for its owners, seems to depend 
upon capital becoming private property. Sup- 
pose public ownership should take the place of 
private property, what effect will such public 
ownership have upon the third circle of circu- 
lation? 

A. There could be no such public ownership 
as you have in mind. The general government 
might own all income property, but it could 
only do so by selling securities to individuals, 
and in so doing it must distribute ownership 
again to private individuals. Capital must 
absolutely be represented in the volume of 
money or it will go out of existence; it must 
sell for cash on demand. 

227 Q. This third profit, accumulating all 
the time to furnish money which represents 



90 The Sphinx Catechism. 

capital, seems to offer an opportunity for a new 
bank in every block in a city? 

A. Yes; banking is as important as gro- 
ceries, and there should be no artificial limits 
to the increase in their number. 



Chapter X. 
STANDARD OF VALUE FOR CAPITAL. 

228 Q. What is the limit to the volume of 
capital ? 

A. Anyone may become a capitalist in any 
field where capital may become profitable, but 
the increase of capital would speedily be lim- 
ited by exhausting the labor market and by a 
rise in wages, which, in such case, would not 
advance commodity prices, but would increase 
the cost of capital and lower its dividends, thus 
setting brakes upon the expansion of capital 
by an increase in wages. 

229 Q. You say that nature allows currency 
to expand in the following manner: First, in 
the wage fund, so as to enable buyers to pay 
twice the cost of every commodity consumed 
and twice the cost of every service furnished 
by capital. Secondly, there is another circula- 
tion which in turn buys capital at twice its 
cost, and then all profits return to their source 
by distributing capital itself to new owners? 

A. Yes. 

230 Q. I think I now have this quantity of 
money problem nearly at command. There are 



92 The Sphinx Catechibm. 

two quantities, one in the wage fund and one 
in the capital fund. The wage fund is made 
up, or should be, of about one dollar in cash 
and three credit dollars circulating as cash, 
and held to a cash standard by being redeem- 
able in cash on demand. In the capital fund 
there is a volume of secondary bills of exchange 
in circulation, now known as stocks and bonds, 
which represent capital at twice its cost, and 
the price of secondary bills of exchange is 
determined by the volume of profits and the 
rate. The rate of profit is made by dividing 
the total annual profit into the total selling 
price of capital, thus creating a circle, which, 
however, is closed by a rate of profit, but which 
nevertheless establishes a standard of value by 
limiting the volume in circulation? 

A. Your statement is correct, and capital 
should be held down to this standard of value 
by being required to sell for its value in money 
on demand. 

231 Q. So far very good, and we seem now 
to be ready to revel in wealth ; a purse of For- 
tunatus is not only filled with inexhaustible 
money, but there is such a purse for every 
laborer, and I can see money, money every- 
where. 

A. What you are seeking? 



Standard of Value for Capital. 93 

232 Q. Suppose we have accumulated a store 
of capital such as we now possess, and suppose 
we have on hand our present store of com- 
modities ; 

A. Go on. 

233 Q. We market about fourteen billion 
dollars in commodities at retail and have an 
annual profit of seven billion to pay to sec- 
ondary labor, but have also as much more as 
we may desire to waste, provided there is no 
particular demands upon us to save. Is this a 
true statement? 

A. Yes; money may be spent in almost riot- 
ous profusion if it is widely distributed, be- 
cause labor produces a continuous crop, and 
because the more we spend in certain direc- 
tions the more we get back to spend again, 
until we tire of mere waste and turn to higher 
things. 

234 Q. But I was only considering commodi 
ties, from which there is now derived an annual 
profit of no less than five billion dollars, and 
there is an equal profit in the secondary 
products ? 

A. Yes; when the first profit gets into the 
wage fund the second one is thereby induced to 
follow it in. 



94 The Sphinx Catechism. 

235 Q. We have then ten billions of profit 
annually to increase wage and to insure pros- 
perity and employ everyone and allow the 
utmost luxury which labor may supply, and 
have a cash market for every form of wealth 
in existence, at twice its cost, with an inex- 
haustible demand for more new wealth than 
we are able to produce? 

A. That is correct, but what are you lead- 
ing up to? 

236 Q. I am considering now only the spend- 
ing money. Besides this, there is the perma- 
nent increase in bank deposits which this 
spending would multiply many fold, and beside 
all this there is the increase in price of tens of 
billions of fixed capital? 

A. Correct; what then? 

237 Q. It is to understand how it has ever 
become possible to dampen this demand and 
contract this circulation, how humanity has 
been so oppressed when everyone, without ex- 
ception, would be enormously benefited by per- 
mitting the natural law to hold full sway. 
How has it been possible not to have had this 
gain in every period of history? Why does 
wealth become so unequal? Why crush itself 
out of existence? Why fall from its own tower- 
ing growth? Why has wealth become a blind 



Standard op Value for Capital. 95 

Sampson, always pulling at the pillars of the 
temple to bring down its own destruction in 
universal ruin? 

A. In order to illustrate this difficult prob- 
lem, I must ask you to consider a change in the 
law and practice of issuing capital and selling 
it to the public. 

238 Q. What is the change you advocate 
based upon ? 

A. It is based upon the necessity of creating 
a cash market for capital, the same as the mar- 
ket price for commodities. It is necessary to 
sell capital as readily as wheat or potatoes are 
sold. 

239 Q. You mean that corporations shall be 
required to provide sinking funds and retire 
their bonds? 

A. No ; I mean to have a financial system in 
harmony with the natural growth in wealth; 
to have capital represented by money instead 
of allowing it to be represented by debt. 

240 Q. You would abolish debt? 

A. There are two kinds of debt, which I call 
primary and secondary, and which are known 
in banking circles as commercial paper and 
collateral securitv. 



96 The Sphinx Catechism. 

241 Q. Then you attack this problem from 
the top, from banking? 

A. Yes; I would, for example, have the law 
draw a line marking off the two classes of 
securities, and only allow commercial bank 
loans to become payable in future time, and 
limit such time to one year. 

242 Q. This would be revolutionary, to cut 
off all other classes of future payments, real 
estate mortgages and bonds. You would para- 
lyze business? 

A. Let us proceed ; the corporation would be 
permitted to issue two classes of securities 
only, instead of the present pyramid, consist- 
ing of tiers of mortgages upon mortgages, and 
of other superimposed layers of preferred and 
common stock, and A, B, C, D collateral trust 
and other bonds and certificates. 

243 Q. You would begin by simplifying cor- 
poration finance? 

A. Yes ; by holding the classification to nat- 
ural lines of cleavage, and not permit the finan- 
cial structure to grow in bumps and crooked 
trunks and other abnormal features, to get 
around interferences. 

244 Q. Then you regard the present complex 
structure of securities as being necessary in 



Standard of Value for Capital. 97 

order to get around some obstruction to nat- 
ural growth? 

A. Yes; but to get to the point: The basis 
of financiering must be the labor cost of cap- 
ital. 

245 Q. Do you base this cost upon all expen- 
diture until there is a return? 

A. Yes; the first layer of securities will 
equal this labor cost, which we will call pre- 
ferred stock, bearing a rate of interest equal 
to the average rate upon money,, and before 
any interest may be paid upon this stock or 
any other profit paid to owners, a reserve or 
insurance fund must be provided by which the 
stock is made payable, principal and interest, 
on demand, to be again sold, keeping the same 
volume in circulation. The market price of 
capital would soon become no less than twice 
this cost, and a second layer of securities may 
then be issued, which we may call common 
stock. This issue may equal or exceed the 
amount of the preferred, and upon the common 
stock a rate of profit in excess of the preferred 
rate may be paid, but its rate should be fixed. 

246 Q. You would have the preferred owners 
benefit first if the property is foreclosed? 

A. The point is to prevent the property from 
being foreclosed and to have the owners bear 



98 The Sphinx Catechism. 

its burdens or surrender them to the state, and 
not be able to shift losses upon innocent pur- 
chasers. 

247 Q. Is the common stock also to have its 
value guaranteed and be made redeemable in 
money on demand? 

A. Yes; before dividends on common stock 
may be paid, a like insurance fund must be 
provided to redeem the stock at its rate of 
profit on demand. 

248 Q. If any corporation became a very 
profitable one and earned more than the legal 
rates, what then? 

A. In such case stock dividends would be 
declared and distributed to preferred and com 
mon holders, to take care of the earnings, thus 
keeping values and rates of profits at a fixed 
standard. 

249 Q. According to the same rule, I suppose 
the outstanding stock would be taken up and 
cancelled, if earnings fell below the rate, so 
as to keep prices in harmony with some stand- 
ard of value for capital ? 

A. Yes; and to make the illustration perti- 
nent to the business of the country, I ask you 
to recall the fact that great bankers in every 
financial center in the world are required to 



Standard of Value for Capital. 99 

provide exchanges where a cash market will be 
found for the securities in which they are inter- 
ested and must protect. 

250 Q. But the stock and other exchanges 
have grown naturally from a desire of holders 
to sell and from the desire of others to buy 
securities? 

A. But that is no reason for the enormous 
concentration of money all over the world into 
a few centers, instead of its being distributed. 

251 Q. But is it not true that the natural 
demand for investment has led to the creation 
of exchanges and to the development of finan- 
cial centers? 

A. The demand for investment gives rise to 
exchanges where capital is bought and sold, the 
same as a demand for commodities gives rise 
to similar market places, but there is no con- 
centration of commodities to a few centers 
while whole provinces are starving for sup- 
plies, as we find in the concentration of all 
liquid capital to only a few money centers in 
the whole civilized world. 

252 Q. We seem to be getting the discussion 
out of line; the point to first explain is the 
necessary connection between a cash market 
for all kinds of capital and a volume of money 



100 The Sphinx Catechism. 

which will permit capital to sell for cash on 
demand? 

A. Unless there is a standard of value in the 
capital market in harmony with its price and 
according to a given rate of profit, there can 
be no real price for capital, and the value of 
capital must become largely and mainly specu- 
lative. Unless fixed and income property may 
sell on demand for its price in money, it can 
have no real value. 

253 Q. You imply by this that investment 
banking, as distinct from commercial banking, 
would fail and would carry capital down with 
it unless powerful groups of bankers main- 
tained a market for the securities they were 
compelled to protect, although such market is 
an artificial one? 

A. Yes; and I desire to illustrate a law 
which governs the circulation of liquid capital, 
and to demonstrate that nature requires cap- 
ital to remain liquid by requiring it to sell on 
demand for its price in money, if it is to have 
any standard value. 

254 Q. The only extent to which this demand 
of nature is obeyed is in the highly speculative 
stock and security exchanges in the financial 
world. If the natural value for capital was 
allowed to freely circulate the required volume 



Standard of Value for Capital. 101 

of money, would every town and city have cap- 
ital markets of their own and be thereby re- 
leased from bondage to money lenders in a few 
financial centers? 

A. Yes; cash security markets, as well as cash 
commodity markets, are an absolute require- 
ment, not only for the development of wealth, 
but more especially for its equal distribution, 
and nature has made ample provision for such 
markets in the wide fields where capital de- 
velops. Credit, instead of having real property 
behind it, has a debt payable in the future, 
which takes the place of cash payable on de- 
mand, and in so doing the credit circulation is 
contracted and we suffer from a continual 
stringency of credit among the mass of the 
people. 

255 Q. What is the natural market condition 
of capital? 

A. A loan of cash should be temporary, and 
should give rise to one tier of credit dollars 
supporting other tiers of credit dollars employ- 
ing labor; but when long-time debts appear, 
the credit dollars are being continually can- 
celled, and each dollar of cash, which should 
support five credit dollars in circulation, is 
loaned five times, and thereby cancels all bank- 
ing credit by creating bank loans which can 
not be paid. 



102 The Sphinx Catechism. 

256 Q. Stock exchange financiers borrow the 
volume of money required for a cash market, 
and thus replace the natural circulation by a 
forced circulation of borrowed money? 

A. Yes; the money which belongs to the 
general market is attracted from every outside 
field to central reservoirs, and the supply of 
capital at all other points is thereby dimin- 
ished. All demands for credit are thus forced 
to turn to the central market for supplies. 
Money can not grow in financial markets, but 
must grow in the wide and fertile fields where 
labor may be profitably and diversely em- 
ployed. 

257 Q. How is money and credit drained 
from other fields of industry to stock and other 
exchanges? 

A. The merchant, the manufacturer and the 
builder have no markets in which their plants 
and stocks of goods have a cash surrender 
value, and, as a consequence, the moment they 
need credit they are forced to depend upon 
other sources, and they must pay exorbitant 
rates or go into bankruptcy when competing 
with capital which has a cash surrender value. 

258 Q. Your first object in reforming corpo- 
ration finances would be to secure a market 
for capital equivalent to the primary market, 



Standard or Value for Capital. 103 

but do you not forget a vital difference, one 
you said was fundamental, in a previous an- 
swer ? 

A. What vital difference have you in mind? 

259 Q. Money circulates in the commodity 
market because goods sell for more than they 
cost, and when you expect corporation securi- 
ties to sell in competition with them, they must 
sell on the same basis of profit? 

A. I do not neglect this important condition, 
but, on the contrary, it is the basis of lending 
money and of paying profit; a note for money 
must bring in more money than was paid out, 
because the owner of money will not otherwise 
part with it, and all increase in payments rep- 
resented by interest and dividends is a part of 
the regular increase in price above cost, and 
for this reason capital must sell principal and 
accumulated profit on demand at any time for 
cash. 



Chapter XI. 

PEKMANENT DEBTS. 

260 Q. There are several very important 
points in your scheme of financial reform 
which are very hard to hold together. Admit- 
ting that a volume of currency must remain in 
circulation so that capital may always sell for 
cash on demand, and also admitting that the 
general government may be justified in main- 
taining such a market at all hazard, why do 
you make such a remarkable difference between 
commercial paper and other securities? Why 
is commercial paper alone to be permitted 
future payments of cash? 

A. Commercial paper may carry future pay- 
ments, while other forms of debt must be pro- 
hibited so as to secure a cash market. Com- 
modities are coming newly into existence all 
the time and the value of money is coming into 
existence with them. There are, therefore, a 
number of gaps which separate the prices of 
commodities being consumed from the main 
stock of commodities, and some form of credit 
must bridge this gap between the present and 
future. Commercial credit connects the pres- 
ent with the future, and upon it the whole 
superstructure of other credit rests. 



Permanent Debts. 105 

261 Q. No one will deny the necessity for a 
tremendous volume of commercial credit which 
forms the bridge to carry wages from the cost 
price to the higher selling price, but this does 
not seem to interfere in any way with allowing 
capital an equal privilege of future payments? 

A. Capital is built upon commercial credit, 
and if it seeks to overcome this dependence by 
supplying itself with future payments instead 
of relying upon a cash market, then a wide gap 
in time results which labor can not bridge. 

262 Q. But there must be a reason for it. 
You simply make the statement that such a 
state of facts exists in harmony with your the- 
ory for a standard of capital value. What is 
the reason future payments for capital are pro- 
hibited? 

• 

A. Capital is not going out and coming newly 
into existence all the time like commodities. 
The price of capital is not consumed, nor is its 
money consumed to be newly created. 

263 Q. But there must be a more important 
reason than any so far given. Your answer is 
not satisfactory; the explanation does not ex- 
plain ? 

A. The reasons given are fundamental ones ? 
but perhaps the explanation is lacking. Com- 



106 The Sphinx Catechism. 

mercial credit makes a cash market possible by 
waiting on both goods and buyers of goods to 
accumulate, and this bridge in time is furnished 
by a lag in wages. The time consumed while 
labor is waiting for its pay supplies all the 
waiting time which nature allows. When we 
create a system of payment extending over 
years of the future, we compel labor to wait 
years for its earnings, which means that it will 
totally miss such paydays. 

264 Q. The answer is sufficient if true; you 
say long-time payment destroys the cash market 
for capital, and the only natural reason for 
future payment of any kind, is that wages must 
lag so as to allow money to get in advance of 
labor and provide a purchase power. May it 
not be equally true with capital in order to 
supply purchase power? 

A. No ; debts in the capital market destroy the 
benefit of the commercial loan. Nature pun- 
ishes us by taking away as much of the cash 
market as we push capital into the future, be- 
cause in so doing we pass by the time where we 
may connect the circulation of credit with the 
circulation of cash. 

265 Q. All capital is based upon tomorrow, 
but only as tomorrow becomes today is capital 
valuable. It is evident that capital would re- 



Permanent Debts. 107 

quire some years to be reproduced; why not, 
therefore, permit an equal deferred time with 
out interfering with the cash market ? 

A. There is no question of reproducing the 
present supply of capital in the future; the 
only effect of future payment is to charge some 
one with a debt for present capital, which must 
be paid by labor in the future. Some one buys 
capital with a promise to pay money at a future 
time, and such money can never come into 
existence. 

266 Q. You mean that when we go beyond a 
certain time limit with debts we can never pay 
them, but must always add to them, because we 
thereby destroy the power to create the money 
which the debt promises to pay? 

A. Yes ; I mean that long-time debts hold out 
of circulation a volume of money which would 
make capital payable in cash on demand. 

267 Q. The point is far from clear. I may 
borrow to build and agree to pay when the 
building has been completed. I can not see how 
this proceeding may interfere with the circula- 
tion of credit, when in fact it puts credit into 
active use among laborers? 

A. There is no objection to co-operation in 
building, by which the cost is borrowed from the 



108 The Sphinx Catechism. 

present to be paid out of returns of the build- 
ing itself in the future. You are begging the 
question. The whole problem relates to the 
form of obligation, whether or not capital shall 
be sold for cash, carrying its increase in price 
along with it, or whether money shall be bor- 
rowed to be paid as cash in the future. 

268 Q. This seems a mere play upon words, 
to sell capital stock which pays a dividend and 
which is guaranteed in money on demand, or to 
sell a mortgage paying interest, having the 
property as security, to be paid in twenty 
years ? 

A. The difficulty arises from not understand 
ing the true nature of borrowing. All capital 
is loaned from society, and such a loan is made 
payable in cash on demand to prevent capital 
from becoming a burden upon labor. Society 
is punished by a contraction in the volume of 
money when long-time obligations are per- 
mitted. 

269 Q. According to your view, it seems that 
a bonded debt of a railway, for example, will 
prevent the same railway finding a market for 
its transportation on account of some inter- 
ference between the debt and the circulation of 
money, by which the volume of money con- 
tracts in proportion to the debt? 



Permanent Debts. 109 

A. Yes ; a permanent railway debt drives rail- 
way capital out of existence. Such debts cause 
a division in profits; a part of the whole profit 
is set aside to maintain the debt. The dollar of 
cash, instead of rolling over in the general mar- 
ket and compounding into five credit dollars, 
rolls over in the loan market and creates five 
dollars of debts which can not be paid. 

270 Q. According to this idea, debts may in- 
crease to the point where they supplant credit, 
and thus make an end to the increase in debt 
and to the circulation of credit, forcing society 
to return to a cash basis, and thereby forcing a 
foreclosure of property to the creditor class? 

A. Yes; room would be made for the debt 
without disturbing the total price of capital, 
and such room is made by a decline in the rate 
of profit. The debt, for example, divides the 
profit, giving one-fourth to the debt and three 
fourths to capital, and the debt might grow until 
it absorbed more than half the profit, when it 
would probably cause the entire failure of in- 
dustry. 

271 Q. Suppose you have, for example, a total 
profit of one billion dollars per annum and a 
debt of five billion is created, which, however, 
equals the whole value of the property, but 
takes only two hundred and fifty million of the 



110 The Sphinx Catechism. 

profit to sustain it. This would leave seven 
hundred and fifty million as dividends on five 
billion of capital instead of a billion dollars in 
dividends, and the capital would command its 
regular price by a reduction in the rate from 
twenty to fifteen per cent, upon five billions? 

A. Yes; and you have apparently added to 
the total wealth by creating a debt. You have 
twice five billions where only one five billion 
existed. 

272 Q. What has really happened has been 
to set aside a certain amount of cash from the 
general circulation to maintain a debt, which 
prevents the same five per cent, from turning 
over as a part of a twenty per cent, dividend, 
and from repeating its capital price in the gen- 
eral market. This division in the rate of profit 
stops distribution and production of wealth in 
all directions where capital might grow by 
twenty per cent, dividends; it limits develop- 
ment to a fifteen per cent, basis, and permits all 
profits above this rate to be capitalized into 
new debts everywhere? 

A. Yes; the fixed indebtedness operates to 
change the distribution of wealth to its concen- 
tration, by permitting owners to borrow the 
value of their property and yet have the prop- 
erty, all of which is brought about by a change 



Permanent Debts. Ill 

in the rate of profit which divides present from 
future payments. 

273 Q. When we are once started upon a 
career of long-time debts, we keep increasing 
them until they finally stop all increase in 
wealth and concentrate wealth to a few money 
lenders ? 

A. Yes. 

274 Q. How is cash tied up by a long-time 
debt? 

A. The currency of a country is a credit and 
a debt combined, a credit to labor past and a 
debt on future labor, but this future debt is 
limited to the time required to allow money to 
get ahead of supply in the commercial market, 
and such time is provided in the lag in wages ; 
but when this time limit has been passed, the 
connection between units of time saved and 
units of labor, which is necessary to create 
money, has been lost. 

275 Q. Each particular property has its price, 
based upon a combined circulation, part credit 
and part cash, and when debts extend the credit 
part of the price beyond the time allowed to 
unite with labor, then the credit to pay the 
debt will fail to materialize? 



112 The Sphinx Catechism. 

A. Yes; capital, in particular, has its price, 
based upon one dollar in cash and five credit 
dollars, and if a debt retires a certain portion 
of this credit beyond the time fixed for its con- 
nection with labor, such credit is thereby de- 
stroyed by being offset by a debt. 

280 Q. The power of the creditor class arises 
from the fact that they contract debts when 
money and credit is abundant, when one dollar 
of cash is keeping five dollars of credit in circu- 
lation, but when the time of payment arrives 
this volume of credit has been contracted by the 
volume of the debt? 

A. Yes; the statement is true for long-time 
capital debts, while the opposite is true for 
commercial loans. In the commodity market 
the volume of cash is limited by natural law 
and may only expand by the creation of com- 
mercial loans, and such loans are always made 
in a narrow money market which the loan ex- 
pands, and when the time of payment is due, the 
credit in circulation has made the debt easier 
to pay. 

281 Q. That again raises a doubt concerning 
your debt theory, because there should be an 
expanding money market with capital in greater 
proportion than with commerce, on account of 
the accumulation of capital when compared 



Permanent Debts. 113 

with a more or less fixed consumption of goods. 
The mystery is why a capital debt differs in 
such a marked degree from a commercial loan. 
The secret must be found somewhere in dividing 
the rate of profit? 

A. You fail to distinguish between an in- 
crease in quantity of wealth and the necessity 
of a corresponding increase in volume of money. 
It is the failure in the volume of money to 
advance in company with the increase in wealth 
which gives rise to all our troubles of distri- 
bution. 

282 Q. The accumulation of capital must 
therefore be represented by a corresponding 
and equal distribution of capital stock paying 
fixed dividends which each corporation must 
be able to redeem on demand in cash; and tbe 
increase in wages and bank deposits and the 
freedom with which bank loans may be paid 
must supply the volume of circulating credit 
to redeem capital on demand? 

A. Yes ; the total limit in the volume of credit 
is as follows : having a labor cost as a basis, we 
save a great number of time units in the sur- 
plus product, and if such time units unite with 
labor by employing it in any direction, then 
they change a credit derived from surplus goods 
into a greater volume of money with which to 



114 The Sphinx Catechism. 

continue to buy and to continually reproduce 
the greater volume of goods. 

283 Q. There are about five such volumes of 
credit above the cash, which must exchange 
with cash and which must circulate directly 
among buyers. Give an illustration of how a 
debt may get around the natural law which 
requires the unit of time to unite with an equal 
labor unit in creating a volume of money? 

A. With business prosperous, and with an 
ample supply of money in circulation, capital 
will have an unlimited market at twice its 
cost, but the new wealth must wait for the new 
circulation before it is expected to sell at any 
price. 

284 Q. Yes; that proposition has been made 
clear. 

A. The promoting capitalist borrows the cost 
price of his property and employs labor to cre- 
ate it, and he expects to sell it for twice its 
cost. He imposes upon the borrowed money the 
function of creating a new money to sustain 
the selling price of his property independent of 
its cost price. 

285 Q. Quite true; but your promoter bor- 
rows profits from the commodity market, which 
at best may only be lost in an unprofitable 
enterprise. Where does the debt come in? 



Permanent Debts. 115 

A. The borrowed money is represented by a 
bond, which equals the profit of one year multi- 
plied by a number of future years determined 
by the rate, and this bond has a price in the 
market, which price has been created by chang- 
ing the rate of profit instead of such price 
arising from an increase in the volume of money 
in circulation. 

286 Q. You doubtless refer to what is known 
as monopoly value — the price of a privilege 
created by law, as apart from a price depend- 
ing upon labor? 

A. Prices rise on account of an expansion of 
credit, and any price above cost may become a 
pure gain to the promoter. 

287 Q. The advance in price above cost means 
an extension of price into future territory, 
thereby demanding new dollars of money to 
meet the higher price in the market. But if a 
debt arises, the need for this present money is 
postponed and is set ahead of its necessary 
connection with labor, and the money required 
to meet the higher prices will fail to mate- 
rialize? 

A. Yes ; but the failure in the circulation of 
the required volume of money will also fail to 
provide the profit which the promoter expects, 
and the higher price would not be realized and 



116 The Sphinx Catechism. 

would fall immediately to the labor cost, unless 
something else may intervene and put off the 
day of loss. 

288 Q. You mean that the money failing to 
circulate in natural channels to keep up the 
price, may circulate for a time in artificial 
channels? 

A. Yes; because owners of property will re- 
sort to any device which may limit or postpone 
a loss in price. 

289 Q. It seems to be your theory is getting 
ahead of your facts. You doubtless refer to 
artificial channels which lengthen the time re- 
quired to supply the greater volume of money, 
and that this time is provided by a long-time 
debt? 

A. Wherein is this theory ahead of the facts ? 

290 Q. Go backward to commodities ; the rise 
in price above cost depends upon the employ- 
ment of secondary labor in creating the very 
capital for which time is extended into the 
future ? 

A. Yes, that is true. 

291 Q. I want to discover how the debt 
changes the situation, because this rise in price 
above cost is always attached to a concrete 



Permanent Debts. 117 

object, and it is unthinkable to offset it by the 
fictitious price of a debt or by a monopoly 
price? 

A. You are right ; price must attach to a con- 
crete object, the same as weight is concrete, 
and price must be balanced by being able to 
attract a volume of cash on demand, the same 
as weight must be balanced by an attraction of 
gravity. 



Chapter XII. 
DIVISION OF THE BATE OF PROFIT. 

292 Q. Going back to your illustration, profit 
is borrowed from the commodity market and is 
spent to employ labor. You admit that the 
entire capital property might become a total 
loss without damage to the general market, but 
you hold that if the promoter is successful, and 
if the capital is based upon a long-time debt, it 
will result in very great damage to the general 
market, although the capital is saved from loss 
on account of a debt which at most can only 
equal half the value of the property? 

A. Nature often seems inconsistent when we 
fail to understand the purpose back of her 
works, but the very difference between a failure 
or a success involves different demands upon 
money. If the capital was lost it would have 
no market price and would make no demand 
upon the currency, but if the enterprise is suc- 
cessful it will command a market price, and 
therefore it must be provided with a volume of 
money from some source. 

293 Q. You mean that the property becomes 
a success by creating a demand for additional 
labor, and in so doing it must originate its own 



Division of the Rate. of Profit. 119 

volume of money ; that it will not be permitted 
to lean upon its borrowed circulation any 
longer than the time nature allots for this 
purpose ? 

A. Yes ; all capital is expected to become self- 
sustaining by creating a self-sustaining money 
of its own. 

294 Q. Well, the question yet remains, assum- 
ing the capital property is a success, how can 
the owner prevent the new labor and the new 
product from creating the money required auto- 
matically, by natural law? 

A. By dividing the price into two parts, one 
part of which returns money to circulation, 
while another part does not so return money 
and is balanced by the perpetual debt. 

295 Q. You mean the whole price does not 
return to circulation, but only so much of it 
as is represented by labor? How can price 
exist unless it is constantly able to sell for its 
money value? 

A. By not selling for its money value, but by 
agreeing to produce the money value in the 
future. 

296 Q. This is begging the question. The 
owner would have no interest in destroying his 
own cash market. How does this separation 



120 The Sphinx Catechism. 

occur from a present price to a future promise 
to pay? 

A. It occurs by. dividing the rate of profit. 

297 Q. You mean the rate divides and thereby 
divides the time of circulation ; the slower time 
allows a longer period for the annual profits to 
equal prices, and thus a twenty per cent, rate 
would reproduce one thousand dollars in five 
years, while the same profit divided into two 
ten per cent, rates would create two prices of 
a thousand dollars each in ten years? 

A. Yes ; and this change may become fatal to 
the circulation of money when the time is ex- 
tended beyond the period required to reproduce 
commodities. 

298 Q. So far the subject clears up to some 
extent; that is to say, we get a division of the 
circulation by a change in the rate of profit, 
which makes an equal change in the time of 
return. A twenty per cent, rate means that a 
definite sum of money will return in five years, 
while a rate of five per cent, would return only 
one-fourth the money in the same time? 

A. The low rate would postpone the time 
beyond the period nature allows, and would 
cause a certain part of the money paid out to 
fail to return. 



Division of the Rate. of Profit. 121 

299 Q. It seemed sufficient to say that the 
period of circulation had lengthened out at the 
expense of the volume of money, and now you 
discover that this extension of time makes a 
corresponding volume of cash sterile — makes it 
fail to give birth to its family of credit off- 
spring? 

A. Yes; permanent debt is a disease of v 
body politic, and its full explanation requires 
us to go to the cause of the disease in the failure 
of the reproductive function. 

300 Q. But you uncover a greater difficulty 
than we have yet considered, because debt 
attacks all forms of property, and you must 
explain how the first dollar is made sterile? 

A. This occurs when land takes a price. Each 
dollar represented by the price of land has lost 
its reproductive power. 

301 Q. You mean that land is not a labor 
product, and therefore when land acquires a 
price it divides the circulation of money by 
dividing the profit between land and capital, 
giving land a part and capital a part? 

A. Yes. 

302 Q. How does this occur? 

A. All capital must arise upon a foundation 



122 The Sphinx Catechism. 

of land, and in the beginning the land is fur- 
nished free. 

303 Q. Very true; but all commodities arise 
from land, which in the beginning is furnished 
free? 

A. We may begin with commodities to dem- 
onstrate the rise of debt, but the complete sepa- 
ration does not occur until capital enters the 
problem and the rate of profit divides. 

304 Q. The profusion of nature secures the 
first surplus supply, and it goes to the land 
owner as profit, who thereby employs other 
labor to make his improvements and to develop 
his land, and he gets this labor for nothing? 

A. But in so doing the landlord does no more 
than if land was as free as the sea, if the sur- 
plus was in fish and if fishing was a joy. 

305 Q. You mean that trouble can not arise 
until there is an investment in land, until land 
is regularly bought and sold in the market? 

A. Yes: when prices advance above cost, the 
spread of industry will increase the demand for 
goods, and then land may command a price 
consisting of the profit in higher prices to be 
derived from future crops. 

306 Q. If land sells at a price determined by 
the profit from future crops, the effect of selling 



Division of the Rate. of Profit. 123 

land is to offer future crops in competition with 
present crops, and therefore to divide the avail- 
able money by taking off a part in payment for 
future crops when buying land? 

A. Yes ; the land will command a price based 
upon an income equal to an income from cap- 
ital. 

307 Q. Assuming that dollars grow into more 
dollars, this land-owning proposition substi- 
tutes growing crops for growing money ? 

A. Your question is exactly right ; the idea is 
general and seems almost ineradicable, that 
growth from the soil may be coined into price, 
that products from land have an intrinsic value, 
and that quantity of value arises from adding 
up the intrinsic values of natural products. 

308 Q. Is not Ricardo's famous, or perhaps it 
were more to the point to say infamous, law of 
rent based upon the proposition that products 
have an intrinsic value which is imparted to 
labor in proportion to the exertion or distress 
the labor occasions, and that all surplus wealth 
is to be attributed to a saving introduced by a 
growing process inherent in land or coming 
from capital; that progress comes not from 
nature in general, but comes from land in par- 
ticular? 

A. Yes; but Ricardo's law of rent gained 



124 The Sphinx Catechism. 

strength from the fact that there is a natural 
process which continually separates labor cost 
from advances in price above cost. This sepa- 
ration is made necessary by the difference in 
time between the cash and credit in circulation. 

809 Q. Ricardo claims that a natural law 
drives men to use continually poorer land, which 
results in a constant diminishing return for the 
same amount of labor? 

A. Yes; Ricardo thus introduces a most in- 
famous standard by which to measure the value 
of labor, and the law of diminishing returns 
has as yet almost universal support in our 
literature. 

310 Q. According to this iron law of wages, 
value is intrinsic and comes from the soil, and 
labor must measure its feeble strength against 
the earth itself, and labor derives its value from 
the intrinsic value of products? 

A. Yes; all increase above this diminishing 
return to labor is said to rightfully become the 
property of the finder, because there is no better 
claim from a superior owner. The claim of 
labor being exhausted as it is driven by the 
pressure of want to use poorer and poorer soil. 

311 Q. When the most exacting labor is ex- 
erted upon the most niggardly land and barely 



Division of the Bate. of Profit. 125 

suffices to keep body and soul together, then 
this Ricardo measure is said to fix the reward 
which nature bestows upon labor? 

A. You state the "iron law" correctly, and 
when the same measure is carried forward to 
capital it holds that all improvements in ma- 
chinery, in arts and sciences by which other 
gains arise, are likewise determined by this iron 
standard, and that wages can not increase ex- 
cept by some kind of charity or by labor organi- 
zations or government ownership or some other 
restrictive legislation. 

312 Q. According to this law, nature is igno- 
rant and niggardly, while economic writers are 
wise and generous ? 

A. Yes. 

313 Q. But surely Ricardo has not been with- 
out opposition in the spread of this fallacy? 

A. No; but the proof seemed in his favor. 
The most convincing criticism has come from a 
protective tariff economist, Henry C. Carey, 
who published his works in 1837, and attacked 
Ricardo's law of rent as follows : "We now pro- 
ceed to inquire what would be the manner in 
which this necessity to having recourse for 
supplies of food to machines of constantly in- 
creasing inferiority (as is claimed by Ricardo 
for land). 



126 The Sphinx Catechism. 

"Let us suppose that instead of commencing 
with axes of stone and rising to those of iron 
and steel, the first had been of steel, but that 
there was a daily increasing difficulty of obtain- 
ing such, and that the settler was gradually 
reduced to the necessity of having recourse to 
'inferior' axes, falling from those of iron to 
others of stone, and see what would be the 
effect. 

"1st. With every increase in the necessity for 
axes, there would be an increasing difficulty in 
obtaining one capable of doing the required 
amount of work. 

"2nd. Every new axe being worse than those 
previously used, there would be a constantly 
diminishing return to labor. 

"3rd. Each year would see an increase in the 
value, estimated in labor, of all previously ex- 
isting axes. 

"4th. Each year the owners of those of steel 
or of iron would be able to demand a larger 
proportion of the product of labor in return for 
the loan of one. 

"5th. Each year there would be a 'diminished 
proportion retained by the laborer/ attended by 
a constant diminution of his wages." 

Thus Henry C. Carey reduces the Kicardo 
law of rent to an absurdity, and Ruskin was 
justified in saying that "nothing in history has 



Division of the Rate. of Profit. 127 

ever been so disgraceful to the human intellect 
as the acceptance among us of the common doc- 
trines of political economy." 

314 Q. You demonstrate that labor cost is 
the foundation upon which the gain in wealth 
is built; that labor cost separates the circula- 
tion of cash from credit, dividing about one-fifth 
of the money in circulation from the remaining 
four-fifths? 

A. Yes; and this process creates a standard 
measure of value for labor which is the very 
opposite of the one proposed in Ricardo's law 
of rent, for it produces a continually increasing 
measure of wages instead of a continually 
diminishing one. 

315 Q. How is that? 

A. As the labor cost increases from the use of 
poorer lands, the labor unit of the cash circu- 
lation increases, thus giving to the credit circu- 
lation a similar gain. The total cash required 
increases as labor is driven to poorer lands, 
and from this greater circulation of cash five 
greater circulations of credit arise, and labor 
should not only get a greater aggregate in 
wages, but each dollar of an increased wage 
should buy a greater share in machine products 
constantly diminishing in cost. 



128 The Sphinx Catechism. 

316 Q. Progress in other directions more than 
counterbalances the use of poorer lands? 

A. Yes; that is the law Henry 0. Carey 
sought to work out. 

317 Q. We come now to the fact that land 
owners control the increase in price in some 
manner, and this control is said to result from 
growth inherent in the soil. In theory, at least, 
the land owner may drive the landless off the 
earth, and may therefore allow them to remain 
on condition they surrender all the wealth they 
produce, save enough food and shelter to keep 
labor in working condition? 

A. Yes ; in theory the land owner may drive 
the landless off the earth, and in theory an 
oppressed people may rise in their wrath and 
destroy their oppressors, but neither theory has 
a basis of fact upon which to build. 

318 Q. You hold that the power of land- 
lordism arises from dividing with capital the 
surplus profits of industry, and that the price 
of land rises as the rate of profit declines? 

A. Yes ; the claim is boldly made that wealth 
belongs rightfully to labor and that the land- 
lord has no particular power over the laborer; 
the landlord may have the power of oppressing 
labor as an employer in a crowded labor mar- 
ket, but with freedom of labor to produce as 



Division of the Bate of Profit. 129 

much as it is able, no power may contend 
against it. 

319 Q. The problem, however, is to discover 
how it comes about that private property in 
land, in its present form, is responsible for 
practically all the distress which afflicts human- 
ity in our own times? 

A. The present land system is an evil on 
account of the pressure of an enormous debt, 
whereby creditors secure all wealth from labor 
by a change in the circulation of money which 
enables the owners to buy wealth on time, while 
the day of payment never matures. 

320 Q. You would then shift responsibility 
from the land owner to the money lender? 

A. No ; the land system is alone responsible ; 
it is the cause of inequality of every kind in 
human affairs; the money lender is its final 
effect. It is not the land owner who finally 
gains all wealth, but it is the money lender, 
who forecloses the mortgage upon labor repre- 
sented by the price of land and brings true the 
end of the world as Hogarth has pictured it. 

321 Q. Accepting as true that the price of 
land is an irredeemable debt, always collectible 
and always renewable, it remains to demon- 
strate how the debt originates in its peculiar 



130 The Sphinx Catechism. 

form. You say it is not essential to begin the 
explanation with the simple forms of labor 
applied directly to the soil, but it is better to 
begin when profit accumulates and creates 
buyers for land? 

A. Yes; the moment a surplus of food or 
other product is exchanged for land, the price 
of the food separates into two parts ; its total 
price divides between cost and credit, and prop- 
erty in land then begins to hold the cost price 
down and absorb all the gains in credit by an 
advance in its own price. 

322 Q. And in doing so the price of land pre- 
vents the progress that nature has in store from 
a widening distribution of the increase in 
wealth, and each civilization has been arrested 
and destroyed when the price of land absorbs 
the credit of a country? 

A. Yes. 

323 Q. Suppose a certain boundary of land 
returns no rent or profit, but merely pays wages 
to its labor, while a similar boundary returns 
ten per cent, of its proceeds as profit, how does 
this rise in rent bring about a change in the 
circulation of money? 

A. The price of the land will be based upon 
this profit. The profit for one year will be 



Division of the Rate of Profit. 131 

multiplied by as many years as the rate will 
determine, and in so doing a price of land arises 
from absorbing the time saved and by uniting 
the units of time with units of land in the price, 
and thereby displacing a measure of labor. The 
price of land is derived from the profit of the 
future crops, and therefore its price can not 
maintain a circulation of money, because the 
units of land in the price will not replace labor 
units in the volume of money. 

324 Q. We seem now to be getting to the 
point where the cause of social disease may be 
laid bare ; this unit of land replacing a unit of 
labor destroys the fertility of money by destroy- 
ing its labor content? 

A. Yes; when the rate divides that part of 
the rate which creates the price of land, changes 
the distribution of wealth into the concentra- 
tion of wealth. When credit changes into a 
debt the turnover in credit ends, and the turn- 
over in production changes to a turnover in 
distribution by which the ownership of wealth 
concentrates. 

325 Q. When land first commands a price, 
does its rate of profit compete with money at 
interest in the commercial market? 

A. No; money is confined to narrow limits 
by natural law, and land being open on all 



132 The Sphinx Catechism. 

sides, it must compete with capital as an in- 
vestment. 

326 Q. If there are different rates of profit for 
capital, and no doubt there would be as many 
rates as there were lines of development, would 
investment in land attract all the surplus cap- 
ital above the average rate? 

A. Yes; and under the general open condi- 
tions illustrated in new country, a rate of profit 
of two per cent, per month or more is general. 

327 Q. Begin with an illustration of the set- 
tlement of a new country, land being free to 
first comers. They bring tools and money with 
them and are connected with an older civili- 
zation. 

A. Such is the only practical method of ex- 
plaining the land question. We need connec- 
tion by railway, a village growing into a city, 
with secondary industries in operation and with 
banks in existence. To explain modern prob- 
lems we need a modern stage to set the drama. 

328 Q. The condition is admitted, and in the 
beginning we have the first settlers taking up 
farming and providing food and shelter for 
their families and congregating around a center 
which later becomes a village? 

A. We need not rely upon our imagination, 



Division of the Hate of Profit. 133 

but may illustrate with a section of our own 
country in any state like Iowa, Nebraska, Ore- 
gon or California. 

329 Q. Use a definite period of about ten 
years, but show first, if you can, the natural 
laws of growth and circulation of money with- 
out land being bought or sold, and then show r 
how a price for land wedges off unequal shares 
of wealth? 

A. There are three factors to consider which 
unite to create prosperity, namely, land, a work- 
ing population and a circulation of money. 
Nothing else enters into the problem, and all 
else arises from these three factors. 

330 Q. Then you omit capital as a controlling 
factor ? 

A. Yes; the circulation of money gives rise 
to capital. 

331 Q. It is quite clear your three factors 
will explain all the facts ; land supplies all the 
raw material, and from this raw material 
money circulates with which labor creates all 
the capital, and the demand for labor constantly 
grows along lines of the greatest return for the 
least exertion? 

A. We could take up each line of production 
in its turn and show how food supplies increase 



134 The Sphinx Catechism. 

rapidly, how commerce starts and how banks 
originate, and how a given population requires 
a given volume of cash. 

332 Q. This limit in money is a new idea ; the 
prevailing one seems to be that you can not have 
too much cash, and your idea that a given popu- 
lation may keep only a given volume of cash in 
circulation should be explained? 

A. Cash will come to the commercial market 
and go from it according to discounts on bills 
of exchange; a given volume of cash must be 
held in circulation for food, and another sum 
of cash is used in commerce; this second sum 
rises and falls according to prices and accord- 
ing to trade. 

333 Q. Is the capital supplied with money 
from the bank circulation? 

A. Yes; there must be an increase in cash 
to follow the increase in production, but all 
capital accounts will depend upon a bank- 
check circulation. 

334 Q. This has been made clear; the profit 
of merchants is equal to half the selling price 
of goods; this profit creates capital, and with 
capital all improvements upon land develop 
and the community grows its own money while 
creating its wealth? 



Division of the Rate of Profit. 135 

A. The truth is clear if only the facts in 
large blocks are considered together, as we 
are now seeking to consider them. 

335 Q. Suppose you take a territory having a 
population of one hundred thousand people, 
and at the end of ten years half of them live 
in a city of fifty thousand population? 

A. So consider the problem and you will 
discover : 1st, the raw land is being peopled at 
an average rate of ten thousand a year from 
the older settled country; 2d, without wealth 
in the beginning the new wealth will double 
once in every four years or thereabout, until 
the natural resources are all improved and 
furnish all the work the labor may perform; 
3d, this increase of wealth should not stop 
when the land has been fully occupied, but 
should change with a changing population at 
the same rate. 

336 Q. It is being assumed, of course, that 
wealth is distributing among this population 
according to the ability of labor, and therefore 
the growth in wealth creates corresponding 
changes in the condition of every one in the 
community. In the beginning all were poor, 
and supply and demand was accordingly re- 
stricted in quantity and quality, but as wealth 
spreads the demand for human ability spreads 



136 The Sphinx Catechism. 

as rapidly, and includes every variety of 
labor? 

A. Yes; but there is a social change to 
which I would refer more particularly, because 
the gain in wages to each individual might be 
wasted in mere pride of display and in greed. 
Society grows with a purpose, and grows ac- 
cording to a superhuman plan. The individual 
must find his greatest happiness and find his 
success in helping to promote this plan and 
purpose. 

337 Q. This may be something that is usu- 
ally overlooked in seeking explanations? 

A. The growing population first develops 
capital in towns and cities, and if the growth 
is allowed to continue it would spread a cor- 
responding gain to the surrounding country. 

338 Q. How about wealth doubling every 
four years? 

A. I am aware that a geometrical progres- 
sion is not possible, but it is true, nevertheless, 
that a progression which starts with seeds 
will grow in geometric ratio until the ca- 
pacity of the earth is reached ; the fertility of 
the soil is not thereby exhausted, as society is 
exhausted in an old civilization, but increases. 
The growing organic world each year gives up 
its harvest and provides for reproduction 



Division of the Rate of Profit. 137 

while constantly improving the organic type, 
and constantly increasing the fertility of the 
soil. 

339 Q. Is the development of the individual 
man the basis of progress? 

A. Yes ; but the progress which needs partic- 
ularly to be explained is what has well been 
called the capital system of production, where- 
by millions of individuals co-operate. 

340 Q. You need capital to constantly re- 
place the old wood with new, to tear down and 
rebuild, so that each succeeding change will be 
better than the one it replaced? 

A. Yes; in every conceivable direction a 
constant change is demanded by a growing 
society; small factories with newly invented 
machines must give way to improved ma- 
chines, and these again to greater factories 
with newer machines. Roads are everywhere 
demanded, harbors and ships change, build- 
ings are as rapidly outgrown, steam replaces 
hand labor, and electricity replaces steam. 

341 Q. You want to avoid an arrested civili- 
zation wherein some force interferes with this 
continual expansion and renewal of wealth? 

A. Yes; civilization spreads; it grows like 
a great tree having wide interlacing branches 



138 The Sphinx Catechism. 

with leaves, and when the tree is cut off from 
light and air, the leaves fail to return vitality 
to the trunk and the working roots are made 
powerless and die. 

342 Q. This primary vital force has already 
been explained as a constant circulation of 
profit, in which selling price is always double 
the cost price? 

A. Yes ; and to carry this truth to its logical 
conclusion, we advance from a dirt road to a 
paved street, from gutters to a modern sewer 
system, from defiled water to softening and 
purifying processes. Gains are arising for the 
entire population everywhere ; the new is worth 
more than the old, because selling prices are 
always higher than cost prices, and for no 
other reason. 

343 Q. But to return to our new community ; 
it was beginning to increase rapidly in wealth 
and population, growing at the rate of ten 
thousand newcomers a year, and doubling in 
wealth every four years for the first ten years 
at least. We are considering this community 
as growing freely from a rise in prices above 
cost and from an unimpeded circulation of 
money? 

A. We may jump the intervening years of 
development and take an existing example 



Division of the Rate of Profit. 1S9 

where one hundred thousand people occupy a 
territory in the center of which is a city of 
fifty thousand inhabitants. Here will be 
found all forms of modern investment, retail 
and wholesale establishments, electric street 
cars, steam railroads, hotels, theatres, water 
and gas, and thousands of homes, farms and 
villages and factories of many kinds. 

344 Q. What is the most important fact to 
be first observed in summing up this develop- 
ment ? 

A. It is that nothing existing here has come 
from the outside; that the wealth was all cre- 
ated within this territory or exists because 
some surplus product has been exchanged 
for it 

345 Q. That would be apparent without par- 
ticular comment, and why lay stress upon this 
fact? 

A. To explain the cause of the unequal dis- 
tribution of wealth and the u f ter absence of 
any reason for it. 

346 Q. How would inequality be explained 
by wealth not coming from the outside into 
this community? 

A. Welath in every community is now ex- 
plained as necessarily depending upon outside 



140 The Sphinx Catechism. 

capital, and each community is said to be 
compelled to surrender to such capital the 
sources of wealth, and it is argued; the exist- 
ing debts represent this dependence upon out- 
side capital. 

347 Q. When you call attention to the fact 
that no material wealth in the community 
came from the outside, you demonstrate that 
debts are not necessary, and are therefore an 
injury to any community? 

A. Yes ; the fact should be self-evident, that a 
new civilization can not fatten from an old 
one, and draw support from it, even in the 
form of a loan. It is true that money from 
the outside is loaned in new communities, but 
such loans are made to permit individuals to 
acquire unearned wealth and are not required 
for development. 

348 Q. If this is true it is interesting. Any 
city could then begin now and rebuild itself 
upon modern lines without debts, adopting 
every new wrinkle of modern science, and 
could do so as rapidly as its labor could 
accomplish the change, by merely providing 
against unequal wealth? 

A. Exactly so. 

349 Q. Each city could own its own street- 



Division of the Rate of Profit. 141 

car system, its light, gas, water plants, pave 
all of its streets, build modern tenements and 
other buildings and create public parks, pro- 
viding the gains were not permitted to fatten 
into unequal wealth? 

A. Yes, and more; it could rebuild every 
building in the city, and if it desired have 
municipal stores, own all its own factories, 
and join with the state and general govern- 
ment in owning all outside utilities. 

350 Q. Of course this is an opium dream 
intended merely as an illustration? 

A. It is intended to show that nature halts 
all progress in proportion as we permit wealth 
to fatten indolence and promote greed instead 
of rewarding industry. I merely state the 
truth when I say there are no limits to devel- 
opment except the limits of natural resources 
and the limit in power of labor and machinery ; 
and, moreover, the insurance against unequal 
distribution is an insurance against the accu- 
mulation of debt. Since improvements must 
be made to pay for themselves, why not, there- 
fore, have many of them? 

351 Q. Well explain, with your illustrative 
community, how this change may be realized? 

A. To begin at the bottom, we find after ten 
years that the wealth in this community is 



142 The Sphinx Catechism. 

about fifteen hundred dollars for each person, 
as shown by an appraisement of property at 
market prices. 

352 Q. This will be admitted; say one hun 
dred and fifty million dollars in value of prop- 
erty of all kinds? 

A. This wealth will now be divided in about 
the following proportions : 

50,000 will have nothing; 35,000 will have 
five hundred dollars each, f 15,000,000; 10,000 
will have two thousand each, $20,000,000 ; 5,000 
will have ten thousand each, $50,000,000 ; 5,000 
will have the remainder, $65,000,000. 

353 Q. Would you have the wealth divided 
equally and ignore the particular ability of 
men to make money? 

A. We will inquire into that particular 
ability. 

354 Q. In this distribution of wealth among 
five classes of people, there are about fifty 
castes, separating the people from each other 
socially upon the theory that differences in 
income and differences in wealth confers a 
personal distinction, which demonstrates the 
superior individual? 

A. If the source of present individual for- 
tunes is examined it will be discovered to have 
its roots in debt. 



Division of the Rate of Profit. 143 

355 Q. The first arrivals secured the best 
locations and the most desirable and fertile 
lands; they were first to go into merchan- 
dizing and reap heavy and early profits; were 
first in organizing industries and took off their 
reward ; were in on contracts for public works, 
and others made fortunes from the rise in real 
estate, and from the growth of capital in cor- 
porations ? 

A. Yes ; this is the source of existing wealth ; 
nowhere is wealth representing the earnings 
of industry. 

356 Q. But how may it be otherwise; some 
one must occupy the best locations ; must farm 
the lands which are more or less fertile, and 
must begin new lines of development in every 
direction, and they deserve success when it 
comes to them? 

A. You beg the whole question. It is not 
a question of preventing rewards, but of re- 
warding the right people, so that the rewards 
may not stop, but may continue in a greater 
and not in a lesser ratio. 

357 Q. You mean that filling up natural re 
sources with owners is not an apology for in- 
equality in wealth? 

A. Exactly; the rise of price which consti 
tutes a reward should be taken off repeatedly, 



144 The Sphinx Catechism. 

whereas it may be taken off but once when it 
is taken unjustly. Nature stops the process 
when inequality in wealth takes place. It is 
not that capable men become wealthy, but that 
their wealth is based upon fraud which places 
heavy and uncalled-for burdens upon other 
men who seem to be and who thereby become 
incompetent. 

358 Q. But incompetence must cut a large 
figure in all development, and it is now only 
more conspicuous because it is confined within 
a short and measurable time and in a visible 
territory under rapidly increasing wealth? 

A. Let us examine and see where the people 
came from who inhabit this new territory and 
acquire such sudden wealth. 

359 Q. They are attracted from the older 
civilizations, where they had no chance to ac- 
quire wealth? 

A. They had no chance, well, for the same 
reason perhaps the men who fail to share in 
the new wealth have had as little chance? 
Were the newcomers wealthy when leaving the 
old settlements and did they take wealth with 
them? 

360 Q. No ; as a rule the men going to where 
land is free are the landless and are of the 
poorer classes. 



Division of the Rate of Profit. 145 

A. Exactly; but meet with them ten years 
later and they have blossomed into candidates 
for the United States Senate, because they 
feel that their own estimate of their wealth 
and importance is the common standard of the 
country, however fraudulently the wealth has 
been obtained. 

361 Q. But do you contend there is no dif 
ference of capacity in men acquiring wealth? 

A. On the contrary, I contend for unlimited 
differences, for as much variety in ability as 
is found in ten million faces, where no two 
resemble each other, and each is distinctly a 
different person, but I also claim that the 
present acquisition of wealth has no deserving 
element in it as a rule, and that the excep- 
tions prove the rule. 

362 Q. You would not get much support 
from the successful for your theory? 

A. Well, however that may be, let us re- 
verse the proposition and reduce the theory 
of individual greatness to its final analysis. 
Let us return the hundred thousand people to 
the places from which they departed and give 
to them the benefit of ten years' experience in 
acquiring wealth, how many would then suc- 
ceed at home? 

363 Q. None of them; they could never get 



146 The Sphinx Catechism. 

a start after ten years' absence. Hindered 
with new families, it would be a modern inva- 
sion of beggars, whom charity alone could keep 
alive. 

A. We are considering something of greater 
interest, namely, a city beautiful, without 
debt. 

364 Q. Yes; as the community grows in 
working population you say it attracts its pro- 
portion of cash from the world's supply on 
account of its commerce with the world? 

A. Yes; and with this supply of cash its 
standard of value is fixed in common with all 
the civilized world, and its capital and wealth 
will then depend upon the activity of its own 
workmen and upon the circulation of cash 
assisted by credit. 

365 Q. Also admitted. 

A. In this community there is no price for 
land, and therefore there will be no desirable 
locations which are not improved in some man- 
ner, and when the price of each improvement 
advances to twice its cost it reaches the upper 
limit of its price. 

366 Q. Taking farms for the first example, 
there is no land but which is being farmed in 
greater or less tracts, and yet they differ 



Division of the Rate of Profit. 147 

greatly in net returns. How would prices for 
improvements alone determine value? 

A. The land would be improved rapidly with 
buildings, fences, ditches and the like, which 
value would always be in demand at twice the 
cost; exceptions might go higher than twice 
the cost of improvements in particular cases, 
but as a rule this difference in price of im- 
provements would give enough elasticity jn 
price. 

367 Q. There might be some further compen- 
sation in taxes? 

A. There would be, since all taxes would 
necessarily be derived from excess in profit 
upon land, and all other forms of property 
must as necessarily be exempt, so as to pre- 
vent municipal and other debts from coming 
into existence. 

368 Q. You make the system of taxation 
the natural outgrowth of development, in order 
to avoid long-time debts? 

A. Yes; public improvements of all kinds 
should be worth twice their cost, and therefore 
they add more price to certain property than 
they cost. 

369 Q. Your city beautiful seems to be crawl 
ing out of the mud ? 



148 The Sphinx Catechism. 

A. No, not yet; in the growing community 
the division of laborers into primary and sec- 
ondary takes place rapidly, and soon provides 
as many secondary laborers as there are pri- 
mary, and thereby establishes a profitable 
price for every commodity. 

370 Q. The wage of secondary laborers will 
then be provided, and a regular battery of 
builders whose sole occupation will consist in 
building and rebuilding and for whom there is 
an ever-increasing fund from which to pay 
them. Would it not be well to explain this? 

A. The continued sale of commodities at a 
profit results in continual expansions of bank 
deposits, which go out into profitable build- 
ing, and do not interfere with the source or 
renewal of such deposits. 

371 Q. The buildings when completed be- 
come a second source of wages and deposits ; a 
store building, for example, in a central loca- 
tion attracts more buyers than elsewhere at a 
uniform price for goods, and the increasing 
sales bring greater profits on account of the 
time saved to buyers. 

A. Yes; and the continual growth expands 
central locations from one into many, each 
location being perhaps of a slightly different 



Division of the Kate of Profit. 149 

grade, but each returning more profit than is 
obtained from other buildings in the city. 

372 Q. This gain has a tendency to run up 
the price of such buildings, when the rise in 
price is checked by an increase in number of 
surrounding buildings ? 

A. Yes ; as the price rises, and as experience 
has been gained, it is not the first building 
that accommodates itself to increased growth, 
but the later ones, which are built with more 
conveniences for the public and which put the 
earlier buildings out of date. 

373 Q. Then the older buildings would halt 
in price at twice their cost? 

A. Yes; and they would give way to newer 
ones as this price was being approached on 
account of the greater profit to be secured 
from a more costly structure to replace them, 
selling at a greater profit on account of greater 
cost. 

374 Q. You are assuming that money grows 
from natural processes, and you are leaving 
the individual out of consideration ; are you 
not forgetting that particular mem are re- 
quired to have money so as to carry out par- 
ticularly expensive works? 

A. On the contrary, I am considering the 
individual in his place, and obviously I am 



150 The Sphinx Catechism. 

forced to ignore the wealthy builder in this 
community because I have not produced him. 
The process of making men of wealth is not 
working. 

375 Q. The supply of money then grows 
from an ever-increasing supply of new im- 
provements, requiring another division of 
laborers to furnish new services? 

A. Yes; and as this demand for labor grows 
it keeps adding an ever-increasing volume of 
bank checks to the circulation, and when the 
number of workers necessary to operate cap- 
ital equals the number of other workers, then 
wages will carry a surplus in bank checks 
equal to the money required to buy all the 
commodities. 

376 Q. Do you mean that laborers could not 
spend all their wages for goods if they wanted 
to do so? That there is a fund so much 
greater than primary demands that it must 
seek secondary investment? 

A. Yes; such is the claim. A single indi- 
vidual, however, may spend all his wages and 
a certain number may also do so, but when the 
entire population is considered, the very 
attempt to spend all the wages for goods 
defeats itself by a rapid advance in price, thus 
saving the gain but allowing the merchant to 
get it instead of the laborer. 



Division of the Eate of Profit. 151 

377 Q. Having established your investment 
fund, proceed to explain how it works in get- 
ting money from millions of workers for great 
enterprises ? 

A. The gain in check circulation which is 
seeking investment promises a golden harvest 
for building promoters, because profits are 
running at a twenty-five per cent, rate, return- 
ing the investment in four years. 

378 Q. Buildings will sell like commodities 
for twice their cost, giving builders a mer- 
chant's profit, which they in turn invest? 

A. Yes; and wealthy capitalists will be 
superseded by the cash capital market, ready 
at all times to buy shares in "every profitable 
enterprise and to furnish all new capital. 

379 Q. You avoid debts by selling stock to 
innumerable investors ? 

A. Yes; except temporary loans in the com- 
mercial market, fixed debts have no opportu- 
nity to grow because the rate of interest is 
against them, and the necessity for long-time 
debt does not arise. 

380 Q. You then equalize the price of income 
property with the price of capital stock pay- 
able on demand? 

A. Yes ; the price of each improvement must 



152 The Sphinx Catechism. 

depend upon its own money, and all capital 
must be represented by an interest-bearing 
security. 

381 Q. Would the cost price be the basis of 
capital stock, or would there would be two 
classes of securities? 

A. I believe that natural corporation devel- 
opment would require two kinds of securities, 
giving the men who will not assume the whole 
risk a lower rate, which they willingly accept. 

382 Q. But you have no securities to be re- 
tired upon the theory that a building must pay 
itself out of debt? 

A. No ; there would be nothing anyone would 
consent to retire, and everyone would want more 
rather than less capital in circulation, paying 
good dividends. 

383 Q. With two classes of stock you would 
require some insurance ? 

A. Yes; all capital stock would have to be 
made redeemable in cash on demand, principal 
and interest, by an insurance fund to accumu- 
late from the profits of the property or to be 
provided by the promoters and investors. 

384 Q. You would prohibit mortgages and 
bonded debts of every description and limit all 
loans to commercial paper? 

A. Yes. 



Division of the Kate op Profit. 153 

385 Q. How now about the city beautiful? 
You have an original money mill working over- 
time and doubling its own volume on the slight- 
est pretext. The more you build and spend, the 
more money remains for further spending? 

A. The operation is simple enough. When- 
ever any enterprise will pay for itself, the secu- 
rities to create the improvement may be issued 
fearlessly, because from its very start it becomes 
the means of its own success. 

386 Q. Suppose a city could ignore value of 
land and tear down old buildings to replace 
them with new ones, how would they begin ? 

A. They would give twice the cost of the ex- 
isting improvement, as the upper limit in price 
in order to gain possession of land, and where 
there is no improvement the tax rate would soon 
give them possession by forfeit. 

387 Q. Issue securities to pay everything ? 

A. Yes ; on the principle of one railroad help- 
ing a branch line to become successful by guar- 
anteeing its securities. 

388 Q. Securities are never to be paid, but 
are to circulate. What kind of a guarantee 
would be required to keep them at par with 
cash? 



154 The Sphinx Catechism. 

A. A sinking fund large enough to pay any 
holder cash on demand, with interest to date. 

389 Q. But with billions in circulation, would 
not the sinking fund become a great strain upon 
resources ? All the holders might demand cash 
in short order ? 

A. There would not be the slightest danger, 
because such securities would be issued in $ 100 
certificates and its multiples, and would circu- 
late as money or be held as investments, and 
each corporation would stand upon its own 
foundation ; there could be no general panic of 
security holders. 

390 Q. This scheme would doubtless make 
each security eminently safe and would put 
Wall Street out of business. But how much 
reserve will be needed and what rate of interest 
do you estimate the securities must bear? 

A. By this plan the general or municipal gov- 
ernment would have a great advantage in many 
lines of development over the private corpora- 
tion, owing to the low rate of interest now 
prevailing and owing to the lower reserve the 
government would require. 

391 Q. Assume any municipal government 
decides to wipe out its present indebtedness, 
how would it go about it and how much reserve 
would be required ? 



Division of the Rate of Profit. 155 

A. If the debt to be discharged now pays four 
per cent, interest, the change could be made 
wi thout cost. 

392 Q. Very interesting, indeed, and it beats 
frenzied finance, but please explain it? 

A. There can be little doubt, for example, 
that a bond of $100, paying one cent in interest 
each day, or three dollars and sixty -five cents 
for one year, on demand, would be much supe- 
rior to a limited term bond paying four dollars 
a year and payable at the end of twenty years. 

393 Q. Yes, very true; but the sinking-fund 
proposition ? 

A. The government wo aid be as safe a deposi- 
tory as are the savings banks, and such banks 
now maintain three billion dollars of deposits, 
which are practically on a cash basis by a 
reserve of less than one per cent. Hence it is 
safe to limit the reserve at five per cent. 

394 Q. According to your statistics, the re- 
serve seems ample; now illustrate how a com- 
munity may wipe out a million dollar four per 
cent, debt by substituting a three and sixty-five 
hundredths per cent, corporation stock redeem- 
able in cash on demand ? 

A. A million and fifty thousand dollars in 
stock could be sold, bearing three and sixty-five 



156 Ihe Sphinx Catechism. 

hundredths per cent, interest, and become less 
of a charge upon the community than the debt, 
as one would require $40,000 a year interest, 
while the other would demand but $38,350. 

395 Q. Very good ; I see a million of debt dis- 
appearing by creating a fifty thousand dollar 
reserve fund without calling for money. How 
about corporation securities ? 

A. The change with corporations would be 
more difficult; that is, with the old ones, but 
new corporations should be required to supply 
a cash surrender value for their issue of secu- 
rities. 

396 Q. Then instead of promoters furnishing 
capital, they merely furnish a sinking fund and 
sell to the public a kind of insured money to 
any amount the public will invest in. How 
about the unsuccessful? 

A. The unsuccessful would have a short life, 
because the insuring corporation must first 
guarantee the general character of the enter- 
prise, and as each share of stock carries with it 
an increase in price on account of interest 
payments, the reserve would not last long if the 
company failed to make good, and each corpo- 
ration would expand and contract its capital 
automatically by the operation of its own sink- 
ing fund. 



Chapter XIII. 
BANKING. 

397 Q. We have wandered a long way from 
our prosperous community, and now in order to 
fully explain how the land system can be made 
responsible for every kind of modern injustice 
and inequality, it seems necessary to return to 
the illustration of a growing community, where 
land is bought and sold as though it were a 
labor product? 

A. In the beginning the land upon which the 
people settle is free, and therefore there is at 
first no impediment to the increase in wealth. 

398 Q. It is well that such should be the case, 
because the settlers bring no wealth with them, 
and if land had not been free they would have 
remained where they came from? 

A. It would be tedious to go over the princi- 
ples of production again, and let it suffice there- 
fore to say that up to a certain time each mem- 
ber secures the land he desires and as much of 
it as he can find labor to use. 

399 Q. The stipulation is granted, and there- 
fore you have a village with its individual stores, 



158 The Sphinx Catechism. 

its tin shops, its carpenters and blacksmiths and 
a village bank ? 

A. It will be admitted that a division of 
workers will take place in the beginning of 
development and that this division establishes 
primary and secondary classes of laborers, 
which creates a profitable market for goods and 
provides employment for all kinds of labor, 

400 Q. Yes; this cause of rising prices and 
of a continuous profit has been established. 
What is needed is to explain the connection 
between the rise in price of land and the circu- 
lation of money? 

A. The most important fact to be kept in 
mind is that only a given per capita of cash 
may be kept in circulation and that all capital 
must arise from the circulation of bills of ex- 
change, commonly known as bank checks. 

401 Q. Which means that production must 
depend upon distribution, and therefore is 
closely connected with the circulation of money 
and with banking? 

A. Starting our explanation with the circula- 
tion of money, let us say the volume of cash in 
our community at a given time is two hundred 
thousand dollars and is limited to this sum by 
the laws which govern its own circulation, and 
this central cash will increase or diminish on 



Banking. 159 

account of the trade between the community 
and the outside world. 

402 Q. Does cash money come into a commu- 
nity or go from it according to rates of ex- 
change? At a given price level the community 
uses a certain volume of money, and it may 
attract more money by discounting this price 
or it may dispose of surplus money by accept- 
ing such discount from other communities with 
which it trades? 

A. Yes ; and it is important to bear in mind 
the limit in this primary cash and to remember 
that local demands for capital must have a 
local supply, which is furnished by banking. 

403 Q. With the given cash circulation lim- 
ited to two hundred thousand dollars, to be 
supplied by a bank, proceed with your illus- 
tration ? 

A. We proceed then with a bank which has 
loaned out two hundred thousand dollars of 
cash to merchants and to employers of labor. 

404 Q. The bank statement would then show : 
Capital $200,000 ; Loans, $200,000 ; Cash, Noth- 
ing ; leaving a large vacancy for deposits, which 
are not yet in evidence? 

A. Very well; money has been employed to 
pay labor for producing commodities, and 



160 The Sphinx Catechism. 

twice as much is produced as the wages of the 
labor so employed will consume, leaving a sur- 
plus of commodities on hand, but no market. 

405 Q. Correct ; and one or the other horn of 
a dilemma now presents itself: First, if the 
price of commodities was to fall to cost so as 
to allow only the actual producers to buy them, 
the non-producers would starve and the money 
loaned by the bank could not be paid and the 
failure to make a profit would stop all industry 
and would require each family to take care of 
itself? 

A. Yes; but we admit the division of labor, 
and by our illustration we pay out $200,000 in 
wages and have a surplus of goods valued at 
1200,000. 

406 Q. I am anxious to know how any of the 
surplus may be sold ? 

A. The laborers wait twenty days or more 
for their pay, and this waiting permits a first 
installment of goods to sell for an installment 
of money equal to twice the labor cost. 

407 Q. For example, when fifty thousand of 
the two hundred has been paid in wages, it is 
being spent for goods which cost only twenty- 
five thousand, leaving a profit to merchant and 
manufacturer of twenty-five thousand? 



Banking. 161 

A. Yes; the manufacturer gets his money 
from the merchant and the merchant from the 
people, while the goods themselves are waiting 
to be paid for. 

408 Q. You have sold goods costing twenty- 
five thousand dollars for fifty thousand retail, 
and the gain must eventually come from the 
credit circulation, while you have taken cash 
for this purpose? 

A. Only temporarily, the profit goes to a 
bank where a deposit then appears. 

409 Q. The bank would then have to make a 
new statement, which would be as follows: 
Loans, f 200,000; Capital, f 200,000; Deposits, 
$25,000; Cash on Hand, f 25,000? 

A. This is correct ; and there is a contraction 
of cash outside which is immediately felt in the 
market, and results in a rush to the bank to get 
this money returned to trade and the bank in- 
creases its loan account. 

410 Q. But the bank could not then loan the 
entire twenty-five thousand because its depos 
itors may demand twenty-five thousand and the 
bank must keep a cash reserve? 

A. The bank protects itself in two directions ; 
it will require the man seeking the new loan to 
maintain a deposit account, and it will also 



162 The Sphinx Catechism. 

keep a reserve in cash sufficient to pay all 
checks. 

411 Q. Suppose the bank loans twenty thou- 
sand of its first twenty-five thousand of de 
posits and thereby gets an increase in deposits 
of twenty thousand from the borrowers, how 
would the bank statement then stand? 

A. Assuming a ten per cent, cash reserve is 
required to pay checks of depositors, the bank 
statement would be as follows : Capital, $200,- 
000; Loans, $220,000; Deposits, $45,000; Ee- 
serve at ten per cent, of deposits, $4,500 ; Loan- 
able Surplus, $500. 

412 Q. The bank may only loan five hun- 
dred dollars and the outstanding cash has been 
reduced in volume from $200,000 to $195,000? 

A. The bank may only loan the money that 
comes in over its counter, and it receives its 
money on the same basis as the merchant ; the 
banker sells credit, and at this point is losing 
money while waiting for an increase in de- 
posits, he must get his loan account to a point 
where his capital will pay a profit. 

413 Q. A stringency of money must be felt 
on the outside because there is a constant sur- 
plus of goods of every description pressing for 



Banking. 163 

sale at twice the primary cost, with but half 
enough money to go round? 

A. This temporary stringency is felt at all 
times in every market, and is constantly re- 
lieved by what is really an extension of bank- 
ing among merchants and manufacturers who 
sell goods on credit, and thus gain time during 
which the credit can get into circulation and 
take up the accounts. 

414 Q. With goods selling at a profit, and 
with people everywhere eager to work and to 
spend, there seems to be no reason for an inter- 
ruption in the growth of profit ? 

A. There is no cause for interruption, but the 
illustration must go slowly in its beginning, as 
we are assuming a settled community, and are 
illustrating conditions which arise only after 
the settlement has taken place; that is to say, 
we are limiting banking to mercantile develop- 
ment, leaving capital out of the discussion, be- 
cause we can not have capital until after bank 
deposits have first supplied all mercantile de- 
mands. 

415 Q. You mean, for example, that all build- 
ing at this point has been done without capital ; 
that the first houses and other improvements 
are not made to sell, but are for shelter and are 



164 The Sphinx Catechism. 

built as simply as possible and with neighbor- 
hood assistance? 

A. Yes ; if you can not follow banking with- 
out calling up a picture of the working com- 
munity, it is necessary at this point to consider 
capital as being restricted to such structures 
as have no market value. 

416 Q. The banking or money situation is 
then as follows: f 195,000 is in actual circula- 
tion, with |45,000 in bank deposits, and the 
contraction of cash of $5,000 is offset by an 
inflation of currency in bank checks which may 
reach $45,000, or nine dollars expansion in 
credit for one dollar contraction in cash? 

A. The bank-check inflation will proceed very 
rapidly ; the entire cash outstanding is making 
a continuous profit by being used in install- 
ments to pay two dollars for goods costing but 
one dollar, and as we considered but one 
|25,000 of profit, there was to follow into the 
bank from the cash in circulation other similar 
profits. 

417 Q. Let us get the first installment of 
checks into circulation, representing $ 45,000 of 
deposits. 

A. The bank check is superior to cash in a 
great many commercial transactions and will 
displace it under such circumstances? 



Banking. 165 

418 Q. Certainly, bank checks will displace 
cash if they are superior, but only when both 
are required. 

A. Yes, certainly; if only one form of cur- 
rency is required the bank check could not cir 
culate, but when given equal conditions the 
bank check is much more convenient than cash? 

419 Q. Because it enables a man to save the 
trouble of carrying various sums of money 
about, and saves making change for many pay- 
ments; a single check may pay one hundred 
pieces of money of various denominations. 

A. Admitting that bank checks will circulate 
on account of the time they save, the inflation 
of currency from bank checks is evident, but 
there is another important gain to be consid- 
ered, made by speeding up the remaining cash. 

420 Q. Do you mean the circulation of 
checks will speed up the cash and make it per- 
form more work on its own account because 
cash is relieved of a certain strain by the circu- 
lation of bank checks? 

A. Yes ; with f 45,000 of deposits circulating 
as money, the checks will first displace the 
money that has the longest distance to move, 
and in which the sums to be paid are the most 
complicated in amount. 



166 The Sphinx Catechism. 

421 Q. Then checks would take upon them- 
selves the hardest and most difficult part of cir- 
culation, the part requiring the most time? 

A. Exactly so, because the check can spare 
the time on account of not being itself re- 
deemed in labor, but must first be redeemed in 
money, and this one step away from labor 
allows a considerable element of time to inter- 
vene, during which time the check may not only 
perform the harder circulation service, but it 
will relieve money altogether from its hard 
work. 

422 Q. This is of enough importance to be 
more fully explained; why not do so? 

A. The problem is simple enough ; the check 
is known to be payable in cash on demand, and 
therefore in waiting for cash it meets its oppo- 
site check, each of which may cancel the other, 
and then two new checks may again arise to go 
over the same ground. 

423 Q. Illustrate this point? 

A. "A" writes a check to "B," who in turn 
gives it to "C," who meanwhile has given his 
check to "A." Hence if equal sums are in- 
volved in each check, both will be returned to 
the point of issue, having passed as money from 
"A" to "B, w from "B" to "C," and back to "A." 



Banking. 167 

424 Q. With this point explained, the new 
community no doubt would increase its bank 
deposits very rapidly? 

A. Yes; and for the benefit to be derived 
from simplicity we will confine the deposit 
account to full units of the entire circulation 
of two hundred thousand dollars. 

425 Q. You mean to jump two hundred thou- 
sand dollars at a time in bank statements? 

A. Yes; at the time the deposits equal the 
capital of $200,000 and the money has returned 
to circulation, the bank statement would be as 
follows : Capital, $200,000 ; Deposits, $200,000 ; 
Loans, $400,000; Cash Keserve on Hand, $20,- 
000, and the bank would have no money to loan, 
while the cash outside the bank has been re- 
duced in volume from $200,000 to $180,000. 

426 Q. The contraction in cash becomes an 
expansion, however, from an increase in de- 
posits, which are now equal to the original 
volume of money? 

A. Yes; the circulation may now be more 
than twice the sum with which we started, and 
there is sufficient money in actual use to em- 
ploy all the labor and buy all the products at 
twice the primary cost. 

427 Q. I gather from this that capital is now 



168 The Sphinx Catechism. 

free to enter the field and is sure to find its 
opportunity and market? 

A. Yes ; but for fear that a complication may 
arise later, we will first carry the bank deposit 
to its ultimate conclusion, since it is self-evi- 
dent that an expansion of checks which must 
be offset by a contraction of cash has a very 
well-defined limit. 

428 Q. You illustrate but one doubling of 
money by bank deposits, which calls for a ten 
per cent, cash reserve; it is obvious, therefore, 
if deposits could grow to ten times the volume 
of cash, there would not be a dollar of cash in 
circulation, and the men who are to pay labor 
in cash, or buy goods with cash, or pay loans, 
would be in a bad situation ? 

A. As there is a definite and fixed volume of 
cash in this community depending upon a 
standard of value for money, so there is also a 
standard of value for capital which fixes a 
limit to bank-check circulation. 

429 Q. It is self-evident that banking could 
not acquire all the cash, because a certain pro- 
portion will remain in the hands of the people. 
How is this outstanding proportion deter- 
mined ? 

A. The limit in banking credit is determined 



Banking. 169 

by the loanable surplus coming into the bank 
from outside operations. 

430 Q. Pile up your deposit account in the 
illustration until you reach this limit? 

A. When each dollar has been loaned three 
times the bank statement will be as follows: 
Loans, $600,000; Deposits, $400,000; Reserve, 
,000; Cash to Loan, Nothing. 



431 Q. The money again returns to the bank, 
piling up deposits to Eight Hundred Thousand, 
and again goes out by increasing loans to the 
million mark, leaving a reserve of Eighty Thou- 
sand Dollars? 

A. Yes ; but at this point the rate of growth 
will be slower, because the bank is approach- 
ing its ultimate limit, for when its deposits are 
five times the volume of cash in circulation, it 
will discover that the demands from its depos- 
itors will take up all the money coming in over 
the counter and the loan and deposit account 
will become stationary or decline. 

432 Q. Assuming the banker may increase 
his deposits to five times his capital, what does 
it signify? 

A. It signifies that the volume of money 
available for banking limits the total volume 
of deposits. One-half the total volume of cash 



170 The Sphinx Catechism. 

is available for banking purposes, and when 
this half has been loaned ten times, leaving 
with the bank a ten per cent, cash reserve, the 
banking money will have disappeared from cir- 
culation and will be held in bank reserves. 

433 Q. This limit in volume of banking credit 
seems to conform to your theory of growth, 
namely, that five credit dollars may attach to 
each cash dollar doing circulating duty? 

A. Yes; but what is most important in this 
illustration is the fact that the excess of de- 
posits creates a much lower rate of interest 
upon money than the rate of profit upon 
capital. 

434 Q. How does such a difference between 
interest and a rate of profit arise ? 

A. Bankers frequently excuse usury on the 
ground that a borrower makes twenty-five or 
more per cent, on a loan at six per cent., and 
claim this division of profits is unequal. 

435 Q. Is it not so? 

A. No; the banker uses the same dollar not 
once, as does the capitalist, but he loans it four 
or five times, and in so doing he keeps the rate 
of money down without disturbing the higher 
rate for capital and gets an equal profit for his 
own capital. 



Banking. 171 

436 Q. Instead of the banker getting six per 
cent, income from loaning money, he gets four 
or five times such rate, provided he pays no 
interest on deposits? 

A. He should pay no interest on deposits, 
and under proper conditions among a wide field 
of small depositors, the banker would be safe 
in charging a fee for providing a check cur- 
rency. 

437 Q. Assume your total deposits are equal 
to five times the volume of currency, how will 
this banking credit divide between commerce 
and capital? 

A. Commerce must have at least one-third of 
the deposit account, leaving two-thirds to cap- 
ital. 

438 Q. But before going into the growth of 
capital, what happens when the limit in deposit 
accounts is reached and loans and deposits can 
no longer expand ? 

A. When this point is reached the standard 
of value for capital should complete a circle of 
circulation and further loans should not be in 
demand; the demand and supply of banking 
credit should balance automatically. 

439 Q. You mean that loans should then be 



172 The Sphinx Catechism. 

paid off in direct ratio to the demand for new- 
loans ? 

A. Yes ; capital should grow and become self- 
sustaining; the loan paid off should be offset 
by a share of stock circulating in the capital 
market, and this release of credit would exactly 
equal the demands for new credit. 

440 Q. Getting the problem down to figures, 
assume for example that after allowing the 
cash to aid commerce, and after the bank has 
Eight Hundred Thousand in loans, of this sum 
Three Hundred Thousand are short-time com- 
mercial loans which are paid and renewed con- 
stantly as goods are being consumed and pro- 
duced, leaving Five Hundred Thousand of bank- 
ing credit free for the capital market. 

A. Your example is a fair statement of the 
case. What next? 

441 Q. This capital fund should also be re- 
newable in the same way as the commercial 
fund. 

A. Why in the same way? 

442 Q. Perhaps not necessarily in the same 
way, but it should be renewable ? 

A. It must be renewed from the bottom up 
and not from the top downward. The banking 
situation now demands the profitable invest- 



Banking. 173 

ment of this credit, so as to make room for the 
growth of profits from beneath to replace it. 

443 Q. You mean this Five Hundred Thou- 
sand should be invested in capital stock of 
profitable enterprises, and the enterprises them- 
selves should furnish their own supplies of 
credit from their own profits, and by paying 
dividends they would keep secondary bills of 
exchange in circulation, representing capital as 
distinct from banking credit? 

A. Assuredly. The banking process circu- 
lates the vital force, which must be accompa- 
nied by the growth of concrete wealth, just as 
commercial loans must be paid and renewed by 
the production and consumption of goods. 

444 Q. Hence the Five Hundred Thousand in 
deposits above the requirements of commerce 
is expected to represent a fluctuating invest 
ment fund? 

A. Yes; and this fund opens up unlimited 
possibilities for the creation of new wealth, for 
the development of capital and for the increase 
in wages. 

445 Q. The builder now appears by finding 
locations where his building will sell for more 
than it cost, locations where buildings will sell 
at the same level of prices as commodities sell? 



174 The Sphinx Catechism. 

A. Yes; and with a growing population, 
meeting no restrictions to its increase in 
wealth, the opportunities to locate improve- 
ments which will sell for more than they cost 
will increase faster than the community grows. 

446 Q. With the interest on money at no less 
than half the profit to be derived from capital, 
it does seem that every requirement in any com- 
munity for an increase in wealth has been 
abundantly supplied by nature? 

A. When promoters may borrow money at 
twelve per cent, and make from twenty-five to 
fifty per cent, in developing natural resources 
of every description, there should be a tremen- 
dous activity. 

447 Q. From a banking standpoint where 
does the interference with this increase in 
wealth first appear? 

A. From the outside market. 

448 Q. Do you mean from the capital market ? 

A. Yes; the failure in the capital market 
starts the backward movement, which is rap- 
idly communicated to commercial markets. 

449 Q. You mean that secondary labor must 
be continually employed in reproducing capital, 
in order to make a market for goods? 



Banking. 175 

A. Yes; and capital as well as goods must 
sell to labor if it sells for cash on demand. 

450 Q. Does the same rule apply that capital 
must sell at twice its primary cost in order to 
sell to labor, on account of the division among 
laborers and in order to circulate the required 
volume of money? 

A. Yes. 

451 Q. But promoters and capitalists would 
willingly build at less than twice the cost, and 
may not prices be shaded if promoters are will- 
ing to accept less? 

A. Promoters are not ultimate consumers, 
and a great mistake is made in assuming that 
prices have a fluctuating standard of value. 

452 Q. What do you mean by a fixed stand- 
ard? 

A. I mean an absolute point below which 
prices may not fall. 

453 Q. That point is labor cost, which may 
be reduced to what a laborer will live upon? 

A. On the contrary, the standard is much 
higher, and when the standard fails it does so 
by limiting employment, but retains its ulti- 
mate price basis. 



176 The Sphinx Catechism. 

454 Q. Explain this position? 

A. Every price depends upon an exchange, 
and every exchange depends upon two costs in 
each supply, which are added together; a sur- 
plus of one kind balances a surplus of another 
kind in every trade, and if this condition is not 
realized the trade fails, making a minimum 
scale of prices which is no less than twice the 
primary cost. 

455 Q. Admitting your contention for a min- 
imum scale of price; although the promoter 
may obtain money at six per cent., he must be 
able to sell capital to ultimate consumers at 
twice the primary cost before enough money 
will reach them with which to buy back their 
own product? 

A. Yes; and what is known as the capital- 
istic system comes into operation on this 
account; the shortage in money circulation 
cuts out the laborer as a buyer, because labor 
must buy in a cash market. The failure of 
labor to buy for cash creates the opportunity 
of the capitalist to buy on time and creates a 
debt, and he shifts the payment to future labor. 

456 Q. Keturning to the total bank deposit 
in our example, we have a divided credit ; three 
hundred thousand goes to merchants' accounts, 
which is continually renewed by the consumer 



Banking. 177 

of goods, and five hundred thousand dollars 
goes to capital account, which should be re- 
newed by a rate of profit, and as the rate of 
profit fails the renewal in credit is replaced by 
an increase of debt? 

A. You state the position correctly. 

457 Q. I suppose we are now ready to intro- 
duce the buying and selling of land in our ex- 
ample, and demonstrate its interference with 
this turn over of capital. 

A. Having a market wherein every conceiv- 
able labor product is selling at a minimum 
price of twice its primary cost, the builder 
seeking to acquire capital finds that the land 
may only be had by purchase. 

458 Q. This means, of course, that a part of 
the five hundred thousand bank deposits are 
drawn into the land market, leaving money and 
commercial credit free for the time being? 

A. Yes ; there can be no contraction of com- 
mercial credit or of the volume of money until 
after a separation occurs between the price of 
land and other prices. 

459 Q. The point now to be considered is that 
progress in every direction is rushing forward, 
but is everywhere being opposed by landown- 
ers demanding a price for land, which price 



178 The Sphinx Catechism. 

substitutes a unit of land for a unit of labor, 
and prevents credit from becoming money ? 

A. When the promoter finds a location or 
natural resource he may improve, and thereby 
increase the volume of goods or services at a 
profitable price, he must bargain for land upon 
which to build, and since he must pay for land 
in advance, such payment becomes a debt un- 
less the land itself may sustain its own price 
without labor. 

460 Q. The original buyer, however, will get 
his return from the future profits he reaps? 

A. Yes; but the price of the land remains, 
which price can not sustain a circulation of 
money and can never have a cash surrender 
value. 

461 Q. You are going too fast. The price of 
land, as was before explained, enters into the 
general field of prices by taking a part of the 
credit price above cost ? 

A. Yes; and for this reason the damage it 
inflicts is not apparent, because present labor 
is not called upon to pay anything it would not 
otherwise pay, and landowners take something 
from future labor by preventing present wages 
from increasing. 

462 Q. That is clear to a certain point, but 



Banking. 179 

the future is always becoming the present, and 
as these future cycles are merged into present 
time, labor finds its wages remain stationary? 

A. This future is a future of reproduction 
and of greater wealth, and therefore of an en- 
larged volume of money with which to buy 
increasing shares of wealth on a cash basis; 
the future cycles of enlarged volumes of money 
change into greater cycles of debt by limiting 
the volume of money to present wages and 
profits. This shortage in the cash market en- 
ables the outsider to buy the wealth on credit 
on account of the difference between the rate 
of profit on money and the ordinary rate of 
profit. 

463 Q. The builder may borrow money at 
twelve per cent, and may sell his building for 
twice its cost, together with the land. He may 
therefore bargain with the owner and pay a 
price for land, depending upon the price he may 
receive for land and improvement together? 

A. Yes ; and whatever the difference between 
the banking rate of interest and the capital 
rate of profit, the builder is always influenced 
by his own market, wherein he must sell at a 
profit. 

464 Q. Suppose a building, at a particular 
location, will sell for four thousand dollars 



180 The Sphinx Catechism. 

and will cost but two thousand, then the land 
owner and builder haggle and trade over this 
margin? 

A. Yes; the builder has a certain amount of 
capital involved which should return the aver- 
age capital profit, and he must be paid for the 
risk he assumes. 

465 Q. The builder must pay twice the pri- 
mary cost for all material entering into con- 
struction and must pay the ruling rate of 
wages, hence the actual cost of the building 
will include a certain per cent, of retail profits ? 

A. It is for this reason that the rise in price 
above cost is not determined by the cost of 
labor and material consumed, but by a rate of 
profit to be derived from the building itself. 

466 Q. If the building pays for its own main- 
tenance and twelve per cent., it can sell for no 
more than cost, but if it pays twenty-four per 
cent, net it may sell for twice the cost? 

A. Yes, that is the idea, provided the banking 
rate is twelve per cent. 

467 Q. If the land owner then splits the 
gain with the builder and gets one thousand 
dollars for the lot leaving one thousand dollars 
for the building above cost, there is room for 
activity in building? 



Banking. 181 

A. Yes ; there is room for production as long 
as there is a margin between the banking rate 
and the capital rate but production and distri- 
bution are separate accounts. 

468 Q. What do you mean? 

A. I mean that the builder must sell either 
to labor at twice the cost so as to enable labor 
to get money with which to buy, or failing, he 
must sell to the so-called capitalists, who bor- 
row the money with which to buy. 

469 Q. As the margin of profit declines and 
approaches the banking rate, wealth is concen- 
trated instead of its being generally distrib- 
uted? 

A. Yes ; the fact that a building at cost must 
include the profit upon the raw material, will 
prevent any direct reduction of the standard of 
wages, but when the rate of profit declines it 
prevents any increase in the wage standard by 
holding prices down to costs of production. This 
limit in profits allows a rise in prices of land 
to take up the increasing credits, which would 
otherwise allow wages to rise, while the rate 
of profit would remain normal, and would cir- 
culate the volume of money required for a cash 
capital market. 

470 Q. The price of a building being divided 



182 The Sphinx Catechism. 

between land owner and builder, and one thou- 
sand dollars being charged as cost for land and 
three thousand as price of building, how does 
this split affect the rate of profit ? 

A. Before the split in profits a building will 
sell for twice its cost, and the profit to be 
derived from it must equal twice the bank rate, 
which we now assume to be twelve per cent., 
and a building, therefore, costing two thousand 
dollars must earn a net return of twenty-four 
per cent., or f 960 per year, to sell at four thou- 
sand dollars. 

471 Q. The price being split, the land will 
command one-fourth of this income, or $240, 
and the building the remainder? 

A. Yes; if access to land is relatively open, 
and if land is not fully improved and occupied, 
there would then be a disposition among land 
owners to sell lots at one thousand dollars 
each which cost them little or nothing, and of 
which they had more than the public could use. 

472 Q. Then in the early stage of develop- 
ment the rate to the land owner would be on a 
twenty-four per cent basis, and the price for 
land would accordingly be held down so that 
one hundred dollars of land value must return 
twenty -four dollars of annual income? 



Banking. 183 

A. Yes; and in the case we are considering, 
the land price at $1,000 would absorb $240 of 
the $960 income, leaving, for the $3,000, an 
income of $720 a year. 

473 Q. At this point there has been no appar- 
ent change in the general rate for capital? 

A. There has been no particular change 
affecting the parties directly interested, but the 
change in the general market has been very 
great, for an improvement that formerly re- 
turned $960 a year and sold for $4,000 now 
returns $720 a year and sells for $3,000. 

474 Q. You have here no reduction in the 
rate, but a division of the total profit, while the 
rate remains stationary? 

A. Yes; there must be a standard fixed for 
land value, and in the beginning this standard 
of value is the same for land as it is for capital. 

475 Q. The loss in price of improvements and 
gain in price of land must have its first effect 
on the outside market by limiting the profit of 
capital, and above such limit land will gain all 
surplus in prices of every description? 

A. The price of land sets a limit to the rate, 
and all profit above the twenty-four per cent, 
limit must increase the price of land. 



184 The Sphinx Catechism. 

476 Q. Supposing the growth of a city in- 
creases profits at central locations so that a 
building costing ten thousand returns a profit 
of ten thousand a year, how does the limit in 
the rate appear in this case? 

A. The total selling price on a twenty-five 
per cent, basis would be four times the annual 
profit of ten thousand dollars, or f 40,000. The 
building which cost ten thousand dollars must 
be conceded a twenty-five per cent, profit, and 
its market price would become f 12,500, leaving 
the remainder, $27,500, as a price for the land. 

477 Q. The money to erect the building must 
be borrowed, and this would give the land 
owner a tremendous advantage over all other 
persons when it came to securing money to 
improve choice locations ? 

A. Such is the case in the beginning of all 
development, and it continues so for some time 
after, but as the rate of profit on capital falls 
toward the rate of interest on money, this fall 
in the rate changes the unequal distribution 
of wealth from land owners to bankers and 
money lenders. 

478 Q. But the land owner who is able to give 
the very best security on account of the high 
price of his land, which can not be destroyed 
or stolen, has every advantage in borrowing 



Banking. 185 

money. He may compel labor to improve his 
farms, his town and city lots, his mining and 
manufacturing sites, at cost price, while his 
land will command prices much greater than 
the price of the improvements. Land owners 
thereby accumulate all income property because 
civilization requires such improvements to be 
made, and they must be made upon somebody's 
land who thereby gains the improvements as 
his property? 

A. In a lower order of civilization than our 
own, the land owner and money lender usually 
combine and continue supreme, but with new 
inventions and discoveries constantly coming 
into existence, large volumes of capital are 
required to introduce the new order, and the 
importance of the land owner gives way to the 
rising prestige of the banker. 

479 Q. Where does the banker get into prom- 
inence? 

A. The banker stands between the circula- 
tion of cash and the circulation of credit, and 
the entire volume of cash will pass through 
banks many times in dealing out credit. The 
banker deals in credit like a merchant deals in 
goods, and his profits are governed by the vol- 
ume of credit he sells. 

480 Q. The banker will have an unlimited 



186 The Sphinx Catechism. 

market for credit so long as the rate of profit 
is four times the rate on money at the bank? 

A. Yes ; the banker selling credit at a much 
lower rate than may be secured from capital, 
will stimulate production wherever the profits 
of capital are higher than the banking charge. 

481 Q. The proposition is clear, and the 
banker must loan his capital four times at six 
per cent if he would secure a gross profit equal 
to twenty-four per cent.? 

A. But when the rate for capital declines 
from twenty -four to twelve per cent., the banker 
finds his field of profit has enormously ex- 
panded, because this decline in the outside rate 
makes room for a very great expansion of bank 
credit? 

482 Q. Assume the capital rate falls from 
twenty-four to twelve per cent., where does 
room for more capital appear? 

A. Suppose for example the rate of twenty- 
four per cent, establishes a standard price for 
capital at ten billion dollars, and at this price 
the annual profit paid will be two billion four 
hundred thousand dollars. 

483 Q. If the rate falls from twenty-four to 
twelve, would not the annual profit decline 
from two million four hundred thousand at 



Banking. 187 

twenty-four per cent, to one million two hun- 
dred thousand dollars at twelve per cent.? 

A. No; the annual sum would not change 
until a much lower rate began to bring about 
a decline in wealth and civilization, by bring 
ing on a decline in wages. 

484 Q. If the annual return remains at two 
billion four hundred thousand dollars, and cap- 
ital had a value of ten billion dollars at twenty 
four per cent., would a decline in the rate from 
twenty-four to twelve per cent, be equalized by 
a rise in capital prices from ten to twenty 
billion dollars? 

A. Yes ; and such a rise in price of ten billion 
dollars is said to be wholly water, since it is 
not the result of an increase in Avealth. The 
gain of ten billion dollars in price represents a 
mere change in proportion of capital to com- 
modity prices and a change in the proportion 
of capital to wages; it amounts to a failure of 
wages to double as prices of capital have 
doubled. 

485 Q. The rise in price of capital from ten 
billion to twenty billion dollars can not be sus- 
tained unless there is a consequent increase in 
volume of money? 

A. Your proposition is correct, if labor is to 
buy capital, but if buying is done by going into 



188 The Sphinx Catechism. 

debt, the higher range of prices may be sus- 
tained for a time by a lower rate of profit. 
The same volume of money will have an in- 
creased duty to perform; profit will circulate 
slower than before and will take twice as much 
time. 

486 Q. What will be the direct effect of this 
rise in capital prices from ten to twenty bil- 
lion dollars and a decline in rate of profit from 
twenty -four to twelve per cent. ? 

A. The effect will be to enormously increase 
the borrowing power of the owners of the 
higher priced property. 

487 Q. Illustrate with the example of the 
property returning a ten thousand dollar 
annual income, the improvement price of which 
was |12,500, based upon a rate of profit of 
twenty-five per cent., the remaining three- 
fourths of the income, $7,500, giving a land 
value of |27,500. 

A. The effect in this case would be as fol- 
lows : The value of the improvement would fall 
to cost and twelve per cent. ; it would fall from 
a total of $12,500 to $11,200, while the price of 
the land would rise. A $10,000 income, when 
divided between land and improvement, would 
allow the improvement twelve per cent, on a 
price of $11,200, or $1,344 a year, instead of 



Banking. 189 

twenty-five per cent, on f 12,500, which had been 
$3,125 a year, and the land owner would receive 
an income of $8,656 instead of $7,500, and the 
greater income estimated at the lower rate of 
profit would increase the value of the land 
from $27,500 to $72,000. 

488 Q. This puts a different construction 
upon a fall in the rate of profit than the one 
now so popular, namely, "the lower the rate 
the greater the blessing." According to this 
illustration the fall in the rate is disastrous to 
industry of every description, and is only bene- 
ficial to the speculator, the land owner and the 
banker ? 

A. If there was only one lot to be considered, 
as in our example, the benefit would all be 
absorbed by the land owner, but as the decline 
in the rate of profit has the effect of increasing 
the value of all land, there will be a rush in 
every direction to put favorable lands to profit- 
able uses with borrowed money. 

489 Q. A great many owners of land will not 
appreciate the advance in price to arise on 
account of the decline in the rate of profit, and 
this fact will allow promoters and speculators 
to reap a rich harvest by improving lands. 
What change will this make in development? 

A. The change will substitute a profit de 



190 The Sphinx Catechism. 

rived from industry for a profit derived from 
an increase in price of land, which can only 
occur once, while profits from industry are 
continually repeated. 

490 Q. When the rate of profit falls and per- 
mits land to advance greatly in price, this ad- 
vance in land value becomes the only incentive 
to improve, and thereby replaces the regular 
and orderly development of civilization? 

A. Yes ; and, moreover, when this advance in 
land value reaches its upper limit, and when the 
profits derived from real estate have been con- 
sumed, all further progress is at an end. For 
this reason the profit to be gained from a rise 
in price of land differs radically and funda- 
mentally from the regular profits of industry. 

491 Q. You mean that the rise in price of 
land failing to be accompanied by the required 
increase in volume of money will soon exhaust 
all available supplies of credit, including the 
gains from the rise in price of land. 

A. Yes; the rise in price of land replaces a 
rise in price of improvements, and as the differ 
ence between cost and selling price is wiped 
out, the profit in production is also wiped out 
and a general failure of demand follows. It is 
not the land market that suffers alone, but all 
other markets suffer before they may force a 



Banking. 191 

decline in the price of land and restore a 
meagre profit. 

492 Q. Assuming the rate of profit declines 
from a twenty-four to a twelve per cent, basis, 
what is the immediate result? 

A. The result is a decline in the selling price 
of all labor products and a rise of two hun- 
dred per cent, on all land which will pay 
twenty-four per cent, profit. The area of land 
to command a selling price will be enormously 
extended, because all income above twelve dol- 
lars a year upon each one hundred dollars of 
value that formerly was credited to capital, 
now becomes rent for land and sustains the tre- 
mendous advance in its price. 

493 Q. This rise in price extends the field of 
security for borrowed money? 

A. Yes ; the field of debt is extended to more 
than double the former capacity. 

494 Q. But since the lower rate slows down 
the circulation of capital, where will the in- 
creased money for new improvements come 
from? 

A. It will come from a remarkable increase 
in bank deposits derived from profits made in 
the real estate market, which have been substi- 
tuted for the regular profits of capital. 



192 The Sphinx Catechism. 

495 Q. This will open up a bankers' paradise 
by giving him new and practically unlimited 
opportunities to lend each dollar of cash as 
often as the laws which govern the circulation 
of money will permit? 

A. Yes; but as this opportunity to lend 
money increases, it carrier its retribution along 
with it, because the money loaned upon real 
estate security can never be repaid, and as a 
result there are continual periods of bank- 
ruptcy and hard times when loans must be 
called to keep the banks themselves from being 
forced to the wall by demands from the de- 
positors. 

496 Q. As the opportunity to profit from a 
rapid rise in land value offers itself wherever 
land may be used, the first effect of a decline in 
the rate would be a lively real estate specula- 
tion based upon a rapid increase of building 
and other improvements? 

A. Yes; practically so because bankers have 
learned from experience that a mere rise in 
price of land is a very bad security for bank 
loans, because the price of land can not return 
money to circulation. 

500 Q. How does the banker gain from an 
inequality in circulation of money? 



Banking. 193 

A. The banker does not gain more from in- 
equality than he would if equality prevailed 
except as the field of banking narrows and 
limits the number who may take advantage of 
misfortune. 

501 Q. One may readily understand that 
banking would expand under equal conditions, 
and gross profits would greatly increase, 
whereas under unequal conditions only a few 
bankers may be so placed in the financial world 
as to be able to profit from inequality ? 

A. Remember that the field of profit for the 
banker expands with the decline of the rate of 
profit, as long as this decline allows any mar- 
gin above the banking rate. 

502 Q. The banker continues to reap no less 
than twenty-five per cent, for his capital, while 
profits in all other lines fall to a much lower 
level? 

A. Yes; the position of the banker is such 
as to give him a practical monopoly and con- 
trol of business of every kind. When a single 
business may extend and pay twice as much 
profit as any other, it is only a question of 
time until it will absorb all other wealth. 

503 Q. A banker represents not one business, 
but every business, because trade can not con- 



194 The Sphinx Catechism. 

tinue without commercial loans, and when the 
banking profit exceeds the profit in the mercan- 
tile and manufacturing business, it is only a 
question of time until the banker will get it all. 

A. When the time of actual absorption by the 
money lender is about to take place, civilization 
will fail because every business will then have 
passed through a series of bankruptcies, and 
the last paring down will have been unsuccess- 
ful; a general failure in every market will 
result in universal disaster. 

504 Q. How does the banking concentration 
arise ? How do gains accumulate to the banker, 
while the property is ostensibly owned outside 
the banking business? 

A. This concentration arises from a regular 
increase in bank loans which can not be paid ; 
and as the rate of profit declines the business 
expands, while the debts increase. Money itself 
is made more difficult to obtain as debts grow 
greater. 

505 Q. May not individual failures correct 
this evil ? 

A. No; the need for money is felt by all 
alike, and the stringency of money is not con- 
fined to any particular class. 



Banking. 105 

506 Q. But bankers may favor certain indi- 
viduals? 

A. Yes ; but rarely in preference to favoring 
themselves, and the power to loan money to 
one and refuse a loan to another adds to bank- 
ing accumulation instead of helping the meri 
torious, as a rule. 

507 Q. The banking power depends upon a 
contraction of credit from the outside into the 
loan department of banks, making the control 
of actual cash much more powerful than it 
should be? 

A. Yes ; although cash itself may expand and 
although the per capita of circulation may in- 
crease, yet the power of a dollar is wholly based 
upon the number of times it may be loaned ; 
but if loans will multiply as fast as new dollars 
appear, the inflation of the currency can bring 
no relief. 

508 Q. The loan account of the banker rep- 
resents the ownership and control of nearly all 
mercantile business? 

A. Yes, but less than half, and probably less 
than one-third the banking power is used in 
commerce, and the investment banks control a 
very large share of the fixed wealth of the 
country. 



196 The Sphinx Catechism. 

509 Q. As banks increase their deposit and 
loan accounts, and as loans can not be paid, 
the bank would be compelled to buy in the 
bankrupt business as profits decline. How do 
banks escape from the demands of their own 
depositors, who really hold the balance otf 
power ? 

A. When the volume of deposits contracts, 
the loans must also be contracted, and we have 
no means of determining to what extent de 
posits are free and may be taken from the bank 
at the will of the depositor. 

510 Q. Do you mean that deposits are them 
selves largely under the control of the banker? 

A. Yes, under prevailing conditions. 

511 Q. But it is generally conceded that the 
banker depends upon the millions of depositors 
rather than upon a few rich men who control 
great fortunes? 

A. It is true that banking even now depends 
upon depositors who number millions, but 
loans are not made to this army of small de- 
positors. 

512 Q. Loans are made to merchants, manu- 
facturers, builders and speculators? 

A. Yes ; and the banker who understands his 
business will usually require the man who car- 



Banking. 197 

ries a loan to also carry an average deposit in 
proportion to his loan. 

513 Q. The banker is blamed for doing so in 
order to compel a man to pay him interest on 
his own money? 

A. The interest paid would be the same from 
loans, because the banker pays no interest to 
his army of small depositors. 

514 Q. Then the banker who requires a debtor 
to maintain an average deposit balance, does 
so to protect his bank? 

A. Yes, because this gives him the quickest 
of assets, and allows a very rapid contraction 
of loans by forcing an average reduction all 
around, and does away with harmful and souie 
time fraudulent discrimination. 

515 Q. When bank loans reach their limit 
and each dollar of cash in the country has been 
loaned as often as it may be loaned, what 
resul ts ? 

A. The first effect is to take advantage of 
quick assets and curtail the credit of merchauts 
and manufacturers, and this in its turn will 
react upon the outside market. 

516 Q. Keact on the outside market because 
the market depends upon borrowed capital? 



19$ The Sphinx Catechism. 

A. Yes; it is the failure of this investment 
market that brings about the first stringency 
of money, and the first relief is found in con- 
tracting commercial credit ? 

517 Q. This seems a rather unjust system of 
relief? 

A. It is not only unjust, but it is also only 
temporary, and banks would otherwise fail. 

518 Q. Do you mean that this stringency of 
money and contraction of credit may occur 
during prosperous times, when abundant har- 
vests are selling at profitable prices, and when 
building operations are in full progress? 

A. Yes, because all business requires a con- 
stant return of the money spent so as to main- 
tain a given circulation, and when a proportion 
of such money and credit is being constantly 
spent for land, it will not only fail to return, 
but the increase in debt uses up all the profits 
in business. 

519 Q. Do you mean that finally the volume 
of debt outstanding will absorb all the circula- 
tion of money except the part required in the 
labor market? 

A. Yes ; if for example the annual profit on 
twenty billions of capital is twenty-four per 



Banking. 190 

cent., one-fourth of twenty billions should re- 
turn each year to sustain such prices. 

520 Q. Then when new enterprises are put 
into operation and when old ones are consum- 
ing all the available returns at twenty-four per 
cent., the competition for money begins, which 
must lower the rate? 

A. The natural order would permit each new 
enterprise to create and take up its own volume 
of money, and sustain its own prices, and thus 
return as much profit to circulation as it takes 
out. 

521 Q. But when land is bought and sold the 
accumulated profits are used to buy land, and 
the actual return of money is limited by the 
sale of land to the profits upon goods in the 
retail market? 

A. Yes ; the actual return is finally so limited^ 
but not until the decline in the rate of profit 
shall equal the interest rate for money. 

522 Q. Meanwhile from what source do profits 
gain in volume? 

A. They gain from profits in real estate by 
which men gain wealth outside of the regular 
channels of business and without earning it. 

523 Q. May the profits derived from increase 



200 The Sphinx Catechism. 

in price of real estate promote building and 
improving the same as other profits? 

A. Yes; they may do so until the debt limit 
is reached. 

524 Q. You mean until buying by an increase 
of debts reaches the limit fixed by retail profits 
on goods at the lowest possible rate of interest ? 

A. Yes. 

525 Q. Would each country in which land is 
bought and sold be continually reaching its 
debt limit as it exhausted its annual profit f un-1 
at any given rate, and would it go forward 
again only as this rate declined and as the 
lower rate allowed the annual profit to sustain 
a greater volume of debt? 

A. Yes; such is the case regardless of the 
natural opportunities waiting to be developed, 
and regardless of the idle labor and idle capltat 
anxious and willing to increase the total wealth. 

526 Q. Illustrate this check to industry from 
buying land in the example we were consider- 
ing of a new community having a city of fifty 
thousand people, with a surrounding farming 
territory, having an equal population of farm- 
ers and gardeners? 

A. The banking position had developed to a 
point where the following results were ob 



Banking. 201 

tained: Deposits, f 600,000; Loans, $ 800,000; 
Cash on hand, f 60,000, ten per cent, of deposits ; 
Cash in circulation, $140,000; Credit in circu- 
lation, $600,000. 

527 Q. Assume the total circulation of cash 
and credit is divided one-third to merchants' 
accounts paying twelve per cent, and two- 
thirds to capital account paying twenty-four 
per cent., and on this basis estimate your stand- 
ard of value for money and for capital ? 

A. On a twelve per cent, basis bank loans of 
$800,000 would return a profit of about $100,000 
per year on a capital of $200,000, or fifty per 
cent, gross, and capital would receive the re- 
mainder. 

528 Q. What would you call the remainder? 

A. The total circulation is $740,000, which is 
returning about twenty-four per cent, per 
annum, which at twenty-four per cent, will 
establish prices for capital at four times this 
circulation of $2,600,000. 

529 Q. With $2,600,000 of property paying 
twenty-four per cent., wealth could double 
every four years and accumulate at that rate? 

A. Yes, and it does so accumulate, but much 
of it becomes land value and all future in- 



202 The Sphinx Catechism. 

crease above twenty-four per cent, becomes a 
price for land. 

530 Q. The land owners now demand a price 
for land, and we will assume total prices ad- 
vance from $2,600,000 to $3,000,000, of which 
sum |400,000 is land value? 

A. In order that land may acquire value, the 
bank will have a loan account based upon real 
estate, which can not be paid. 

531 Q. Assume that half the loans of $800,- 
000 are such real estate loans, consequently 
half the bank credit fails to circulate and a 
stringency of money is felt, how is this strin- 
gency relieved? 

A. The bank requires its loans to be renewed 
every ninety days on an average, and the high 
rate of interest will cause a rapid change in 
loans on account of cheaper money from the 
outside ; the bank will be relieved by the debtor 
shifting loans of ninety days to a mortgage of 
five years or more. 

532 Q. Then your deposit and loan account 
will be drawn down $400,000? 

A. No; the new money coming in from the 
outside will lower the rate while it increases 
the available funds, and the deposits which 
have been withdrawn are quickly restored. 



Banking. 203 

533 Q. Will this decline in the capital rate 
from twenty-four to twelve per cent, affect the 
banking rate of twelve per cent. ? 

A. Yes ; as the returns from capital fall from 
twenty-four to twelve per cent., the banking 
rate will follow and fall from twelve to six 
per cent. 

534 Q. This makes room for a great expan- 
sion of capital prices? 

A. It makes room only for capital at twelve 
per cent., because land value will absorb all the 
difference, and where there is no further in- 
crease in price of land, all development will 
stop. 



Chapter XIV. 
THE RISE IN PRICE OF LAND. 

535 Q. Explain how development is checked 
by a rise in price of land? 

A. Room for the development of capital con- 
sists of the difference between cost and selling 
price of any improvement made upon land for 
any purpose. 

536 Q. If it is farming land, the improvement 
would consist of farming operations whereby 
crops were produced having a higher selling 
price than the cost price? 

A. Yes ; and as the price demanded for land 
approaches or exceeds this limit, all forms of 
development must be carried on at cost prices 
and without profit, or labor and capital must 
remain idle. 

537 Q. In a city of fifty thousand inhabitants 
there are numberless opportunities to create 
improvements, there being many old buildings 
which should give way to new and better ones ? 

A. Yes ; every city presents a ragged sky line, 
owing wholly to the obstruction caused by the 
price of land. The price of land absorbs all 
profit above cost in every building. Central 



The Rise in Price of Land. 205 

locations which command high rents are in- 
tended by nature to be adorned with beautiful 
and costly buildings suitable to the annual 
rent. 

538 Q. Instead of the center of a city having 
many beautiful buildings selling for more than 
they cost, the buildings sell at cost, while the 
location sells for the profit the building should 
carry. For this reason a good location with an 
old building will advance in price until such 
advance absorbs all the profit that nature 
allows to the building which is expected to fill 
the location, and instead of erecting a new 
building in order to gain the profit, the land 
owner gets the gain without being required to 
provide the necessary improvement on the 
land? 

A. A building site in the center of a city has 
its limit in price fixed by the rent that a suit- 
able building would command, and the good 
locations will advance in price so as to absorb 
the profit of the building which should be 
erected there. 

539 Q. Suppose such a site is encumbered 
with an old building costing fifty thousand, 
which rents for thirty thousand dollars a year, 
but would support a building costing a million 
dollars renting for two hundred thousand dol- 



206 The Sphinx Catechism. 

lars a year, what price will the location alone 
command ? 

A. After the million dollar building had been 
provided with its necessary share of the annual 
income, the land value would absorb the re- 
mainder. 

540 Q. That is to say, if the building cost one 
million dollars and would sell for two million 
on account of its income, the land owner may 
demand one million dollars for his location by 
taking the price of the building above cost as 
a price for the location? 

A. Yes, such is the rule, and it accounts for 
the persistence of the old and dilapidated 
buildings which now disgrace the best loca- 
tions in every city in the civilized world, and 
it demonstrates clearly the remarkable power 
for evil the landlords are allowed to exercise. 
They destroy all markets for labor and capital, 
and they finally destroy the market for their 
own property. 

541 Q. What is now a rise in price of land 
should become, and otherwise would become, a 
rise in price of building above cost, and on the 
whole the landlords would be the gainers from 
a change which would allow continual crops of 
profits to be harvested from buildings where 



The Rise in Price of Land. 207 

now only a single crop may arise from the in- 
crease in the price of land? 

A. Yes; the mischief of the present system 
does not result from the fact that landlords 
get advanced or unearned profits, but results 
from the fact that a rise in price of land de- 
stroys the continual reproduction of such price. 

542 Q. Landlords get a profit from the rise 
in price of land in advance of any building 
upon it, and in taking off this advance profit 
they make it impossible for labor and capital 
to erect the building? 

A. Yes; because this advance profit is in- 
tended to encourage building, and when it be- 
comes a price for land it destroys all incentive 
to build. 

543 Q. Capitalists may pay the higher price 
for land owing to a sudden change in the rate 
of profit which gives them an advantage over 
the land owner ; there are periods, therefore, 
when this obstruction to improvement is tem- 
porarily overcome; when new and great enter- 
prises are undertaken, but they must even then 
be undertaken by an increase of indebtedness? 

A. Yes; in the modern world there has been 
rapid advances in progress owing to new inven- 
tions and discoveries, which capital alone could 



208 The Sphinx Catechism. 

put into use. The level of land value is fixed 
by the prevailing order; when a new advance 
in science or industry appears, or when a de- 
cline in the rate of profit occurs, the price of 
land can not advance in all places ahead of 
this development, because a higher price can 
only be realized after the new improvements 
have been established. 

544 Q. Hence in building railroads and in 
erecting great office buildings, theatres and 
hotels, the price of land does not directly pre- 
vent such improvement ? 

A. It does not directly prevent a few of 
them, which are necessary to demonstrate the 
gain, but the moment a great building at any 
location is made a success, then the advance in 
adjoining lands absorbs the profit by which 
other great buildings would repeat the first 
success. 

545 Q. The moment the greater profit comes 
into existence on account of new advances in 
science or industry, two direct results are ap- 
parent ; the first will be an increased power to 
incur new debts, with which the new develop- 
ment takes place, and the next will be an in- 
creased price of land, whereby the new progress 
will be throttled, leaving a greatly increased 
debt with a diminishing power to pay? 



The Rise in Price of Land. 209 

A. The great office buildings of a city are 
like tall monuments of empire surrounded by 
ruins. The high price paid for land creates an 
abnormal building in order to secure the vol- 
ume of rents demanded by the increased expen- 
ditures. 

546 Q. The adjoining land owners will de- 
mand an equal price for land, based upon the 
greater rents realized from the new improve- 
ment? 

A. Yes; they will demand such prices, but 
will fail to get them, for the reason that inas- 
much as the new sky line is above normal, it 
should be and will be balanced by vacant 
spaces adjoining. 

547 Q. Do you mean the greater capacity of 
the higher buildings will rob adjacent grounds 
of tenants at any rent? 

A. Yes; modern development has made the 
maintenance of great improvements an enor- 
mous expense, which may only be undertaken 
with the required number of tenants, and com- 
pensation will be established by an open space 
surrounding the building. 

548 Q. If the land owner is to be robbed of 
his tenants by demanding a greater price than 
capital will pay, it seems that nature is therebv 



210 The Sphinx Catechism. 

equalizing demands and will restore order out 
of chaos? 

A. On the contrary, the change is one that 
allows us but a choice between evils; we are 
forced "to jump out of the frying pan into the 
fire." 

549 Q. What do you mean by this ? 

A. The land system continues to prevent the 
circulation of money, and the few spots and 
strips of right of way which are highly im- 
proved by capital, merely represent sporadic 
gains in conserving the benefits of civilization 
and of preventing absolute ruin by land own- 
ers, but it also delivers labor and capital bound 
hand and foot into the power of the money 
lender. 

550 Q. You say that the modern gains of in- 
dustry are sporadic attempts at conservation, 
but what is to prevent such spores from spread- 
ing into adjacent territory? 

A. The failure of wages to rise, the failure of 
profits to return money to circulation, and the 
ultimate failure to pay even the cost of main- 
tenance in the prevailing system of develop- 
ment. 

551 Q. Do you mean that our present system 



The Rise in Price of Land. 211 

is one that must involve the country in univer- 
sal ruin if it is allowed to continue unchecked ? 

A. Yes; there can be no doubt of the awful 
calamity which the increase of fixed indebted- 
ness has in store for our civilization. History 
will repeat itself in our own times, and the 
universal curse of debt, which has destroyed 
all former civilizations, may also destroy our 
own civilization. 

552 Q. If the cost of land was eliminated, the 
price of the improvement only would be consid- 
ered, and the higher the range of such prices 
the greater the activity in building? 

A. Yes ; and because a building requires light 
and air, the same as a tree in a forest, the value 
of buildings would govern their construction, 
instead of being governed by the value of land, 
and the more valuable the building the greater 
would be the free space surrounding it. 

553 Q. You say that modern development de- 
stroys the landlord's power and will slowly 
bankrupt such of them as depend upon the 
price of land, because the power of gaining 
wealth from labor has now fallen into the hands 
of money lenders. Please explain this point? 

A. The obstructive power of the landlord is 
limited by a natural law fixing a standard of 



212 The Sphinx Catechism. 

value for land the same as for capital, namely, 
by a rate of profit. The price of land limits 
this rate, and while the rate of profit is declin- 
ing the price of land and the apparent power 
of the land owner increase. The price paid for 
land operates to destroy the cash market for 
capital by changing credits into debts. This 
failure of a cash market creates a progressive 
stringency of money, and as a result of the 
stringency in money, and of the growth of irre- 
deemable debts, the power of the landlords is 
finally transferred to the money lender, who 
alone may employ land and labor. 

554 Q. Another question about the stringency 
of money. You say the stringency of money is 
always felt in the failure of a cash market for 
capital, and is in direct proportion to the price 
land bears to all other prices. Since the price 
of land can not circulate its own volume of 
money, it thereby imposes a double duty upon 
the volume which does circulate, and it may 
only do so by borrowing this volume of money 
over and over again? 

A. Yes; and the power of the money lender 
arises from this fact, and from the further fact 
that his own profit is the last to suffer in the 
general decline, since he deals in cash, while 
land owners and capitalists depend upon the 
circulation of credit payable in cash on de- 



niand. If each dollar is loaned five times at 
half the value of the property, then the control 
of less than half the money also controls ten 
times as much wealth as the volume of money. 

555 Q. As the price of land advances and 
assumes a greater and greater share of total 
prices, the necessity of borrowing money to 
sustain prices of every description increases, 
but the banking rate of interest falls in common 
with the decline in the rate of profit? 

A. The banking rate falls, and will finally 
involve everyone in ruin when it circulates less 
money than is required to employ labor and 
maintain capital. 

556 Q. The various turns along the path 
wherein the money lender gains an advantage 
over the land owner come into existence with 
changes in the rate of profit to lower levels ? 

A. Yes; at each change in rate of profit to 
lower levels, the volume of checks which fail to 
redeem themselves, and which must be re- 
deemed in cash, increases, giving to each dollar 
of cash a command over credit it could not 
otherwise obtain. 

557 Q. The first effect of a decline in the rate 
of profit causes an enormous increase in land 
value; to cut the rate in half will not onlv add 



214 The Sphinx Catechism. 

two hundred per cent, to existing land values, 
but it will bring into existence a new and enor- 
mously increased territory which was valueless 
at the higher rate? 

A. This first decline is merely plowing the 
soil with the fiery bulls of speculation for the 
future benefit of the banker, because it ushers 
in a period of wild and reckless real estate 
speculation and introduces an era of cheap and 
inefficient development. 

558 Q. When does the banker turn the tide 
in his own favor? 

A. The higher price for land and the lower 
rate of profit are coupled to enormous advances 
in science, and therefore require large volumes 
of capital upon small areas of land. This con- 
dition brings about combinations among indus- 
tries which may survive the low rate of profit, 
and not only meet the costs of great enter- 
prises, but furnish profits to bankers which 
otherwise would become higher prices for land. 

559 Q. As the rate declines to low and lower 
levels, competition sets in and begins the work 
of destroying civilization on account of the con- 
tracted field of industry. This destruction by 
competition is overcome by the fortunate ad- 
vances made by science, coupled with the fact 
that bankers alone possess the power to take 



The Rise in Price of Land. 215 

advantage of new conditions and supply the 
ready money required at low rates of interest? 

A. Each period or halt in progress is occa- 
sioned by a stringency of money, and although 
the banking rate of interest declines, the need 
for money increases; the profits from specula- 
tion furnish bank deposits, whereby each dollar 
is loaned more times as the rate of interest 
declines, and allows the same profits to bankers 
to continue, while on the outside the lower rate 
of profit is destroying one section of the middle 
class after another and compelling the concen- 
tration of vast wealth to financiers. 

560 Q. What is the present condition of the 
money market in the United States ? 

A. If you will begin your investigation at 
any point in the past you will discover that 
bank loans grow only as deposits grow, and 
that deposits are limited in growth to periods 
of rising prices. 

561 Q. Is a protective tariff and an inflation 
of the currency defended upon the theory that 
we advance in wealth only as we increase bank 
deposits from profitable prices? 

A. Yes; but experience demonstrates that 
prosperity depends almost wholly upon ad- 
vances in prices of land, which rapidly overtakes 



216 The Sphinx Catechism. 

all other profits and as rapidly destroys them 
by an increase of debts. 

562 Q. The curse of our civilization seems to 
be an increase of irredeemable debts? 

A. Yes ; every period of hard times and panic 
is brought about by the increase in bank loans, 
whereby the cash in circulation is contracted 
to banks; each dollar is loaned five times, and 
then no more loans may be made ; old loans can 
not be paid, because the money has been with- 
drawn from circulation. 

563 Q. This retirement of cash to bank re- 
serves will then be followed by a contraction 
of five times the volume of checks? 

A. Yes ; such will be the result until a period 
of bankruptcy follows, which relieves the coun- 
try of a certain portion of the tight debts, and 
a part of the cash and credit is thereby re- 
leased, to be again wound up into new debts 
and to be again followed by hard times and 
liquidation. 

564 Q. Is there such a contraction of cur- 
rency to banks at the present time? 

A. Yes; the rise in prices of real estate all 
over the country provided large gains for the 
fortunate owners, which has greatly expanded 
bank deposits and has provided funds for a 



The Rise in Price of Land. 217 

great expansion of debts, whereby many enter- 
prises were allowed to expand; this expansion 
of industry created wide markets for labor and 
commodities at advancing prices. 

505 Q. The past ten years of prosperous bus 
iness has had a false foundation, since it was 
built upon one wave of improvement without 
profit, which was followed by a wave of profit 
in real estate, which again added to new im- 
provements and again made new profits in real 
estate. The rise in price of land absorbed all 
the profits the new improvements produced and 
would otherwise have continued, but we have 
now used up the gains made by improving and 
expanding over new lands, and we look in vain 
for something to start a new season of pros- 
perity ? 

A. Yes ; an examination of banking statistics 
will disclose a remarkable increase in the num- 
ber of new banks during ten years, and a re- 
markable expansion in the volume of cash. In 
spite of the fact that we now have a greater 
number of banks, a much greater volume of 
deposits and a remarkable expansion of cash, 
the renewal of the circulation of this tremen- 
dous volume of cash and credit has come to an 
end; each new dollar of cash has been loaned 
more than five times, and the loans have be- 
come fixed in higher prices for land and can not 



218 The Sphinx Catechism. 

be liquidated except by lower prices and hard 
times. 

566 Q. There are now about fifteen billion 
dollars of bank deposits and more than three 
billion dollars of cash in circulation. If land 
had no selling price, the bank loans would be 
paid regularly, and in this manner the enor- 
mous volume of cash and credit would be kept 
in regular circulation? 

A. Yes ; but the present rate of profit does 
not permit this turnover in circulation, and the 
stringency of credit is now forcing a decline in 
prices of every description, which will not only 
force profits to lower levels, but which must 
bring about a liquidation of bank and other 
debts before enough credit may be liberated to 
move this year's crop and allow the country to 
exist on a hand-to-mouth basis. 

567 Q. You seem to hold that we only ad- 
vance in wealth by creating new debts; that 
each advance reaches the limit of debt when all 
profit above the interest on money is tied up 
by higher prices for land, and as we reach this 
debt limit we must stop all progress until liqui- 
dation forces a decline first in the profit upon 
capital and then of the interest upon money? 

A. Yes; every period of progress in the 
United States is marked by periods of hard 



The Rise in Prick of Land, 219 

times when a new adjustment takes place in 
the rate of interest and rate of profit, and this 
lower adjustment increases the debt limit hy 
extending the time of payment into the more 
distant future. 

568 Q. There will come a time when we reach 
the limit of this extension of debt into future 
territory, and there will come a time when liqui 
dation will finally have concentrated all our 
wealth into strong hands. What is the limit of 
the decline in the rate of interest which ends 
all further increase in debt and ends all accu- 
mulation of wealth except to the few who have 
been successful in relieving the debtor in past 
liquidations ? 

A. The limit is reached in two directions; 
the first limit is when the price of land pre- 
vents general progress in every direction by the 
cost of land depriving all new development of 
profit. 

569 Q. This first limit would then confine the 
activity of the country to existing forms of cap- 
ital, confine all industry to a limited and to a 
declining market for labor and capital, and 
what then? 

A. When we destroy secondary expansion 
and cease to circulate secondary profits, we are 
confined to primary profits derived from the 



220 The Sphinx Catechism. 

sale of commodities and utilities, and we force 
great number of laborers out of employment, 
who can not again be employed until the entire 
system is changed. 

570 Q. When do we reach the limit and go 
backward? 

A. We go backward the moment the natural 
profit on goods must be spread over capital in 
order to maintain a rate for capital equal to the 
low rate for money. 

571 Q. As we keep going backward there 
must be a decline in prices as the rate of profit 
declines, instead of the former rise in prices? 

A. Yes; when the limit in price of land has 
been reached and when no more debts may be 
made, then there will occur a shrinking demand 
which will limit and contract the total annual 
profit. The price of land sets a limit at once 
to the volume of profit, and if it were possible 
for land, in the beginning, to reach its maxi- 
mum price, the effect would be to starve the 
people by their failure to develop natural re- 
sources on account of the price demanded for 
land. 

572 Q. The civilized world suffers everywhere 
from making land private property, and in the 
United States we seem now to confront a period 



The Rise in Price of Land. 221 

of hard times in the near future from which 
there will be no recovery ; times when the men 
thrown out of work by a failure of demand will 
remain out of work ; when silent furnaces will 
remain cold, and when empty houses will for- 
ever be without tenants ? 

A. The situation you describe is but the his- 
tory of civilization repeating itself, because the 
riddle of the Sphinx, which is the riddle of 
industry, has not been answered. 

573 Q. But with all the preceding explana- 
tion of principles, and with all the questioning 
of the Sphinx, the hard problem remains, to 
find the way out; to unwind the rope in the 
illustration of Henry George, where a great 
bull, which represents Labor, is tethered to a 
stake, around which he has wound the rope in 
grazing; on all sides is rich grass, but the bull 
is a close prisoner, with his head to the ground 
and his rope holding him down. "How shall 
we unwind the rope," is the important problem? 



Chapter XV. 

CONCLUSION. 

A. It is not alone labor that is tied fast with 
its rope of opportunity wound around a stake, 
but capitalists and land owners are also sur 
rounded with untold wealth which they may 
only employ by unwinding the rope, and they 
are equally helpless on account of the threaten- 
ing condition of labor. 

574 Q. This dangerous condition of modern 
civilization and the danger of unequal wealth 
has everywhere been admitted, and no credit 
may be gained in this day by anyone who ex- 
hibits the festering sores of civilization, and 
who does not prescribe a sensible remedy? 

A. There has been a multitude of remedies 
already prescribed. 

575 Q. Quite true, but they are impossible on 
their face. We are confronted by conditions 
which can not be changed by theories, but 
which must be changed of themselves. We can 
not go backward and begin a new civilization 
according to some plausible theory, but we must 
accept conditions as we find them and moke 
what changes are required by modifying them ? 



Conclusion. 223 

A. Unless the fundamental principles up^n 
which our civilization is based are discovered 
and applied, we will never know how to change 
conditions, however unanimous we may be that 
a radical change is necessary and can not be 
long delayed. 

576 Q. In what particular has the principles 
so far developed demonstrated the way to un- 
wind the rope, the way to change prevailing 
conditions ? 

A. The belief is general that in order to 
change modern civilization to a higher stand- 
ard, the mass of the people must be educated 
to the advantage of the proposed change before 
it may be successful. 

577 Q. What the Socialists call class con- 
sciousness must arise among the mass before 
they will assert their rights or remedy their 
wrongs ? 

A. Such is the general opinion among S >eial- 
ists and others, and the idea prevails that the 
education of the mass of the people along eco 
nomic lines is absolutely necessary before any 
general or important change may be under- 
taken. 

578 Q. Do you dispute such an evident propo- 
sition? It seems inconceivable that without 



224 The Sphinx Catechism. 

education any great forward movement is pos- 
sible? 

A. This is begging the question. It is true 
that without education any great change is 
impossible, but this does not refer to the kind 
of education the theory of reform suggests. 

579 Q. You mean the education of the mass 
is not essential, but that the few must acquire 
a correct knowledge before the change may be 
made successfully? 

A. Yes; a very few may succeed in creating 
marvelous economic changes. 

580 Q. How so? 

A. The few may inaugurate a change at one 
place which has such obvious money benefits 
to themselves and to others that the new oppor- 
tunity to make money will spread like a prairie 
fire. 

581 Q. For example,- mention some such 
change ? 

A. The introduction of steam and electricity 
did not require technical knowledge among the 
people in order to extend the benefits of such 
development, but it first met with the violent 
opposition of the mass. 

582 Q. Do you mean that the discovery of 



Conclusion. 225 

correct economic principles will afford new and 
great opportunities to make great sums of 
money for those who put the correct principles 
in operation ? 

A. Yes; and such opportunity will not be 
restricted to introducing new lines of enter- 
prise, but will offer great profits in prevailing 
enterprises, by having them conform to correct 
financial and economic laws. 

583 Q. Mention a single example? 

A. Any new corporation may issue its stock 
so as to make it redeemable in cash on demand, 
principal and interest, and it would at once 
establish the superiority of such an issue. 

584 Q. But the present heavy debts and long 
time bonds of existing corporations could not 
well be suddenly changed? 

A. Each of the great corporations is rapidly 
being confronted by the danger of their own 
debt, and by the fact that they will soon be 
unable to secure the new money they require, 
and by the further fact that they can not meet 
new changes demanded by progress, unless they 
may secure new money from some source. 

585 Q. The present disorder in distribution 
of wealth is a result of long continued abuses, 
whereby wages have remained stationary, while 



226 The Sphinx Catechism. 

wealth has developed in enormous proportion. 
Money circulates in artilicial channels instead 
of natural ones, and the volume and rate of 
profit is much too low for the new order to 
replace the old? 

A. In unwinding the rope, it is true we have 
a short end of rope to begin with in our tight 
line of debts, but each turn in unwinding will 
increase the ease with which subsequent 
lengths of credit may be liberated. 

586 Q. Your proposition of unwinding the 
rope is of this character: we are now bound 
close by credit being tightly wound around the 
stake by debts. We suppose it is necessary to 
pay these debts, and when some of them must 
be paid on account of all of them destroying 
the outstanding credit, we have a period of 
bankruptcy and hard times. You propose to 
pay them all without any liquidation to speak 
of, and not only release a small part of credit 
to circulation, but to release all of it? 

A. The new proposition is to secure a path 
whereby this temporary relief from debt will 
change to a permanent relief and debt will be 
abolished without stopping industry, and with 
great advantage to all concerned. 

587 Q. The great evils of debt have always 
been recognized by every writer on public quefe- 



Conclusion. 227 

tions, but any remedy was forestalled by the 
apparent necessity of requiring debts io be 
paid in order to prevent any sacrifice in the 
time-honored and sacred rights of property, ihe 
writers forgetting all the time that debt itself 
was working a fearful destruction in the sacred 
rights of property for the mass of mankind? 
A. Yes. 

588 Q. According to the scheme proposed, the 
corporation is not to be required to pay its 
debts, but is to be allowed to make such value 
perpetual by creating a reserve fund which will 
be but little more than one year's interest 
money on the present debt? 

A. Yes; that is the manner in which the 
change proposed will be of great advantage to 
labor and capital. 

589 Q. This no doubt would require govern- 
ment regulation of corporations? 

A. Yes; but only to protect the investments 
of the public. The government could safely 
guarantee the redemption of capital stock on 
demand by taking charge of the reserves, and 
in case of any failure to keep its stock at par 
the company would at once be operated by a 
government receiver and its securities held at 
par and reduced in volume to conform to the 
established standard of value. 



228 The Sphinx Catechism. 

590 Q. In abolishing all but commercial 
debts, the general and municipal governments 
should be first to make the change, and to do 
so would probably require extensive changes in 
the system of taxation? 

A. The new system of taxation has already 
been put into successful operation in e^ery pro- 
gressive city in the United States and in many 
other countries. 

591 Q. Do you refer to assessments accord- 
ing to benefits? 

A. Yes; the debts of both the general and 
municipal governments arise wholly on account 
of defective tax methods. Every government 
expenditure is a benefit to some property owner 
by increasing the price of his buildings; to 
assess the expenses of government upon the 
property benefited will not only abolish all 
other forms of taxation, but will provide a cash 
basis for conducting the government. 

592 Q. If a city desires to improve a street, 
instead of issuing bonds, you would have it 
issue a corporation stock, which would be a 
lien upon all the property benefited by the 
improvement, the same as is now being done 
with bonds ? 

A. Yes; except no provision would be made 



Conclusion. 229 

to retire the stock, because if the stock was 
retired the benefits derived from the improve- 
ment would never become a part of the wage 
fund, but would permanently add to the value 
of abutting property, at the expense of labor. 

593 Q. You mean to say that streets, sewers 
and all other forms of permanent improvements 
need to be represented by liquid capital? 

A. Yes, most decidedly, and in such forms 
as are demanded by the requirements of trade. 

594 Q. The issue should be in such denomi- 
nations of one hundred dollars and its multi- 
ples as circumstances would demand? 

A. Yes ; in order to keep the volume of money 
and capital equal to the demands of the cash 
market, it is necessary to have all valuable 
property represented by its own value in the 
circulation. 

595 Q. Would a part of this capital stock 
circulate as money? 

A. Yes ; all currency above fifty dollar denom- 
inations should consist of one hundred certifi- 
cates, bearing interest, so as to draw the re- 
quired volume of them into circulation. 

596 Q. In this manner you would rapidly 
increase the money in circulation at a uniform 



230 The Sphinx Catechism. 

standard of value and in local quantities to fill 
up local requirements, and would pave the way 
for a marvelous season of unending prosperity? 

A. Once the system obtains general headway, 
it would gain speed and power constantly, and 
capital would increase rapidly until the check 
came from a rise in wages. 

597 Q. But with wages rising, profits would 
rise and would again expand capital? 

A. Not necessarily, because the time will 
come quickly when the volume of capital and 
the price of capital will reach the limit of price 
determined by the standard of value, and wages 
continuing to rise will require the rate of profit 
to advance. 

598 Q. Then the reason we must now conform 
to existing rates of profit is because the present 
standard of wages is below the natural stand- 
ard, and wages can not rise until after we 
secure the increase in circulation, which a cash 
market for capital will introduce? 

A. Yes, and because we must begin the 
change under prevailing low rates of profit, gov- 
ernments will have an enormous advantage over 
other corporations and can not be hampered by 
them in introducing the new order, but, on the 
contrary, will be eagerly solicited by them to 



Conclusion. 231 

be permitted to issue insured stock in place of 
debts and to have the government supervise 
their finances. 

599 Q. Suppose a railway corporation desired 
to secure the assistance of the general govern- 
ment in changing its present system to con- 
form to the new regulations, how would the 
volume of capital be determined? Would a 
physical valuation of the railway property be 
required to fix a basis of value for securities? 

A. No; the standard of value for capital is 
not directly determined by what is known as 
physical value, because of the wide variation 
between cost and selling price, and the capital 
to be issued to the public should be governed 
by a selling price standard without regard to 
cost, be the cost more or less than the true sell- 
ing price. 

600 Q. Suppose a railway system having now 
a variety of bonds and stocks in circulation 
should desire to conform to the uniform system 
you outline, and issue only two kinds of securi- 
ties, which are to be guaranteed by the general 
government at par and interest on demand, how 
would the capital value be determined in your 
judgment? 

A. The gross receipts is the basis of all pay- 
ments, either of wages or dividends or liqui- 



232 The Sphinx Catechism. 

dating excess capital, and making it conform to 
a uniform standard of value. 

601 Q. The first charge upon gross receipts 
is for wages and the cost of maintenance, which 
must be deducted before there is a surplus for 
capital at any price? 

A. Yes; the past experience of railways, for 
example, under good management, will prove 
that sixty per cent, of the gross receipts is re- 
quired for current accounts and forty per cent, 
may be set aside as the income for capital 
account. 

602 Q. The railway seeking to take advan- 
tage of the new system offers no other balance 
sheet to the government than an accurate state- 
ment of its average gross receipts for a ten year 
period, for example, together with its expenses ? 

A. Such would be sufficient, and if its aver- 
age gross earnings were ten million dollars per 
year, of which forty per cent, would be allotted 
to capital account, its selling value would be 
easily estimated. 

603 Q. In such case four million dollars a 
year would apply to capital, and the total issue 
of a standard six per cent, security would fix 
the value of the railway at about sixty-five mil- 



Conclusion. 288 

lion dollars, and five per cent, of this sum must 
be set aside for the reserve or insurance fund? 

A. If the rate of interest was six per cent, 
the reserve must be maintained at five per cent, 
above interest accumulations, and eight per 
cent, would probably be required in this case, 
allowing six months' interest in advance to be 
held in the reserve fund in addition to the five 
per cent 

604 Q. In such case the government would 
exercise a trustee's supervision over the finances 
of each corporation, as is done by corporation 
bankers ? 

A. Yes. 

605 Q. Could the government debt be elimi- 
nated in the same way ? 

A. Yes; the government should replace its 
debt with national stock at a uniform rate 
also at a rate higher than the prevailing one, 
and make the exchange for its present debt, and 
stop interest on the original debt after oppor- 
tunity to exchange securities had been given. 

606 Q. In each municipality the issue of cor- 
poration stock would bring about the much to 
be desired local supply of capital held to a 
local circulation? 

A. Yes. 



234 The Sphinx Catechism. 

607 Q. The tax system must necessarily 
change by an extension of the present system 
of assessments according to benefits until it 
includes all manner of taxation, national, state 
and municipal, in order to maintain the various 
departments of government on a cash value 
basis ? 

A. Yes. 

608 Q. And all that is at present required to 
revolutionize the distribution of wealth is for 
governments to open the way; to change their 
own debts into credits, and offer opportunity 
and assistance to other corporations to follow 
their example? 

A. That is all. 

Baltimore, Md., April, 1911. 



r 16 1911 



One copy del. to Cat. Div. 

Hit 19 i9ir 



